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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
------------------------
SUN ENERGY PARTNERS, L.P.
(NAME OF THE ISSUER)
SUN ENERGY PARTNERS, L.P.
KERR-MCGEE CORPORATION
KERR-MCGEE L.P. CORPORATION
KERR-MCGEE ENERGY CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
DEPOSITARY UNITS
(TITLE OF CLASS OF SECURITIES)
866719107
(CUSIP NUMBER OF CLASS OF SECURITIES)
RUSSELL G. HORNER, JR., ESQ.
SENIOR VICE PRESIDENT
AND CORPORATE SECRETARY
KERR-MCGEE CORPORATION
123 ROBERT S. KERR AVENUE
OKLAHOMA CITY, OKLAHOMA 73102
TELEPHONE: (405) 270-1313
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
COPY TO:
DAVID B. CHAPNICK, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE: (212) 455-2000
------------------------
THIS STATEMENT IS FILED IN CONNECTION WITH (CHECK THE APPROPRIATE BOX):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF FILING FEE
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<TABLE>
<CAPTION>
TRANSACTION VALUATION AMOUNT OF FILING FEE
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<S> <C>
$43,372,825* $8,674.57
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</TABLE>
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
<TABLE>
<S> <C>
Amount Previously Paid: $8,674.57
Form or Registration No.: Preliminary Schedule 14C
Filing Party: Sun Energy Partners, L.P.
Date Filed: May 25, 1999
</TABLE>
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* For purposes of calculation of the filing fee only. The amount assumes
7,543,100 limited partnership units, representing all limited partnership
units other than limited partnership units owned by Kerr-McGee Corporation and
its affiliates, will be converted into the right to receive $5.75 per unit in
cash.
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<PAGE> 2
This Rule 13e-3 Transaction Statement on Schedule 13E-3 relates to the
merger of Sun Energy Partners, L.P., a Delaware limited partnership ("Sun Energy
Partners"), with Kerr-McGee Energy Corporation, a Delaware corporation
("Kerr-McGee Energy") and a wholly owned subsidiary of Kerr-McGee L.P.
Corporation. Kerr-McGee L.P. Corporation is a Delaware corporation and a wholly
owned subsidiary of Kerr-McGee Corporation, a Delaware corporation ("Kerr-McGee
Corporation").
On May 24, 1999, Sun Energy Partners and Kerr-McGee Energy entered into an
Amended and Restated Agreement and Plan of Merger, pursuant to which Sun Energy
Partners will be merged with Kerr-McGee Energy and holders of limited
partnership units (other than Kerr-McGee Corporation and its affiliates) will
receive $5.75 per unit in cash, without interest (except that $1.23 of such
amount will be subject to court approval of the settlement of litigation in
connection with the merger and will be paid together with interest from the date
of the merger to the date of the court approval). A copy of the Amended and
Restated Agreement and Plan of Merger is attached as Appendix A to the
Information Statement filed by Sun Energy Partners with the Securities and
Exchange Commission on the date hereof pursuant to Regulation 14C under the
Securities Exchange Act of 1934. A copy of the Information Statement is attached
hereto as Exhibit (d).
The information set forth in the Information Statement is incorporated in
its entirety by reference. The following is a summary cross-reference sheet
pursuant to General Instruction F of Schedule 13E-3, showing the location in the
Information Statement of the information required by Schedule 13E-3.
2
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<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM CAPTION IN INFORMATION STATEMENT
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<S> <C> <C>
Item 1. Issuer and Class of Security Subject
to the Transaction
(a), (b) Cover Page and "Introduction"
(c), (d) "Price Range of Depositary Units; Cash
Distributions"
(e) Not applicable
(f) "Introduction" and "Special Factors -- Background"
Item 2. Identity and Background
(a)-(d); (g) Cover Page; "Available Information";
"Introduction" and Schedule 1
(e), (f) None
Item 3. Past Contacts, Transactions or
Negotiations
(a), (b) "Special Factors -- Background"; "Special
Factors -- Purpose and Structure of the Merger"
and "Certain Contacts and Transactions with
Affiliates"
Item 4. Terms of the Transaction
(a), (b) Cover Page; "Introduction" and "The Merger"
Item 5. Plans or Proposals of the Issuer or
Affiliate
(a)-(e) "Special Factors -- Purpose and Structure of the
Merger"
(f)-(g) "Special Factors -- Effect of the Merger on the
Market for Units; NYSE Listing and Securities
Exchange Act Registration"
Item 6. Source and Amounts of Funds or Other
Considerations
(a) "Special Factors -- Financing of the Merger"
(b) "Fees and Expenses"
(c), (d) Not applicable
Item 7. Purpose(s), Alternatives, Reasons and
Effects
(a) "Introduction"; "Special Factors -- Background";
"Special Factors -- Purpose and Structure of the
Merger" and "Special Factors -- Reasons for the
Merger"
(b) "Special Factors -- Alternative Transactions
Considered"
(c) "Introduction"; "Special Factors -- Background";
"Special Factors -- Purpose and Structure of the
Merger"; "Special Factors -- Reasons for the
Merger"; "Special Factors -- Alternative
Transactions Considered" and "Special
Factors -- Fairness of the Merger"
(d) "Introduction"; "Special Factors -- Background";
"Special Factors -- Purpose and Structure of the
Merger"; "Special Factors -- Alternative
Transactions Considered"; "Special
Factors -- Fairness of the Merger"; "Special
Factors -- Effect of the Merger on the Market for
Units; NYSE Listing and Securities Exchange Act
Registration"; "Special Factors -- Material
Federal Income Tax Consequences" and "The
Merger -- Effects of the Merger"
</TABLE>
3
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<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM CAPTION IN INFORMATION STATEMENT
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<S> <C> <C>
Item 8. Fairness of the Transaction
(a)-(b) "Special Factors -- Background"; "Special
Factors -- Terms of the Merger; Conflicts of
Interest"; "Special Factors -- Fairness of the
Merger" and "Special Factors -- Opinion of
Financial Advisor to the Board of Directors of
Kerr-McGee Corporation"
(c) "Special Factors -- Fairness of the Merger"
(d) "Special Factors -- Terms of the Merger; Conflicts
of Interest" and "Special Factors -- Fairness of
the Merger"
(e) "Special Factors -- Background"; "Special
Factors -- Terms of the Merger; Conflicts of
Interest" and "Special Factors -- Fairness of the
Merger"
(f) Not applicable
Item 9. Reports, Opinion, Appraisals and
Certain Negotiations
(a) "Special Factors -- Background" and "Special
Factors -- Opinion of Financial Advisor to the
Board of Directors of Kerr-McGee Corporation"
(b) "Special Factors -- Opinion of Financial Advisor
to the Board of Directors of Kerr-McGee
Corporation"
Item 10. Interest in Securities of the Issuer
(a), (b) "Introduction" and "Special Factors -- Background"
Item 11. Contracts, Arrangements or "The Merger"
Understandings with Respect to the
Issuer's Securities
Item 12. Present Intention and Recommendation
of Certain Persons with Regard to
the Transaction
(a), (b) "Special Factors -- Background" and "Special
Factors -- Purpose and Structure of the Merger"
Item 13. Other Provisions of the Transaction
(a) "Special Factors -- No Appraisal Rights"
(b) "Special Factors -- Other Unit Holder Rights"
(c) Not applicable
Item 14. Financial Information
(a) "Selected Financial Data -- Sun Energy Partners"
and Parts II and III to Information Statement
(b) Not applicable
Item 15. Persons and Assets Employed, Retained
or Utilized
(a), (b) Not applicable
</TABLE>
4
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<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM CAPTION IN INFORMATION STATEMENT
------------------- --------------------------------
<S> <C> <C>
Item 16. Additional Information Information Statement in its entirety
Item 17. Material to be filed as Exhibits
(a), (e), (f) Not applicable
(b) Appendix B
(c) Appendix A
(d) Information Statement in its entirety
</TABLE>
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a), (b) The information set forth on the cover page and under
"Introduction" in the Information Statement is incorporated herein by reference.
(c), (d) The information set forth under "Price Range of Depositary Units;
Cash Distributions" in the Information Statement is incorporated herein by
reference.
(e) Not applicable.
(f) The information set forth under "Introduction" and "Special
Factors -- Background" in the Information Statement is incorporated herein by
reference.
ITEM 2. IDENTITY AND BACKGROUND
(a)-(d), (g) The information set forth on the cover page and under
"Available Information"; "Introduction"; and Schedule 1 in the Information
Statement is incorporated herein by reference.
(e), (f) During the last 5 years, none of Kerr-McGee Corporation,
Kerr-McGee L.P., Kerr-McGee Energy, and Sun Energy Partners, nor, to the best
knowledge of Kerr-McGee Corporation, Kerr-McGee L.P. and Kerr-McGee Energy, any
of the persons listed in Schedule 1 to the Information Statement (1) has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (2) was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a), (b) The information set forth under "Special Factors -- Background";
"Special Factors -- Purpose and Structure of the Merger" and "Certain Contacts
and Transactions with Affiliates" in the Information Statement is incorporated
herein by reference.
ITEM 4. TERMS OF THE TRANSACTION
(a), (b) The information set forth on the cover page and under
"Introduction" and "The Merger" in the Information Statement is incorporated
herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a)-(e) The information set forth under "Special Factors -- Purpose and
Structure of the Merger" in the Information Statement is incorporated herein by
reference.
(f)-(g) The information set forth under in "Special Factors -- Effect of
the Merger on the Market for Units; NYSE Listing and Securities Exchange Act
Registration" in the Information Statement is incorporated herein by reference.
5
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ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATIONS
(a) The information set forth under "Special Factors -- Financing of the
Merger" in the Information Statement is incorporated herein by reference.
(b) The information set forth under "Fees and Expenses" in the Information
Statement is incorporated herein by reference.
(c), (d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a) The information set forth under "Introduction"; "Special
Factors -- Background"; "Special Factors -- Purpose and Structure of the Merger"
and "Special Factors -- Reasons for the Merger" in the Information Statement is
incorporated herein by reference.
(b) The information set forth under "Special Factors -- Alternative
Transactions Considered" in the Information Statement is incorporated herein by
reference.
(c) The information set forth under "Introduction"; "Special
Factors -- Background"; "Special Factors -- Purpose and Structure of the
Merger"; "Special Factors -- Reasons for the Merger"; "Special
Factors -- Alternative Transactions Considered"; and "Special
Factors -- Fairness of the Merger" in the Information Statement is incorporated
herein by reference.
(d) The information set forth under "Introduction"; "Special
Factors -- Background"; "Special Factors -- Purpose and Structure of the
Merger"; "Special Factors -- Alternative Transactions Considered"; "Special
Factors -- Fairness of the Merger"; "Special Factors -- Effect of the Merger on
the Market for Units; NYSE Listing and Securities Exchange Act Registration";
"Special Factors -- Material Federal Income Tax Consequences" and "The
Merger -- Effects of the Merger" in the Information Statement is incorporated
herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION
(a)-(b) The information set forth under "Special Factors -- Background";
"Special Factors -- Terms of the Merger; Conflicts of Interest"; "Special
Factors -- Fairness of the Merger" and "Special Factors -- Opinion of Financial
Advisor to the Board of Directors of Kerr-McGee Corporation" in the Information
Statement is incorporated herein by reference.
(c) The information set forth under "Special Factors -- Fairness of the
Merger" in the Information Statement is incorporated herein by reference.
(d) The information set forth under "Special Factors -- Terms of the
Merger; Conflicts of Interest" and "Special Factors -- Fairness of the Merger"
in the Information Statement is incorporated herein by reference.
(e) The information set forth under "Special Factors -- Background";
"Special Factors -- Terms of the Merger; Conflicts of Interest" and "Special
Factors -- Fairness of the Merger" in the Information Statement is incorporated
herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a) The information set forth under "Special Factors -- Background" and
"Special Factors -- Opinion of Financial Advisor to the Board of Directors of
Kerr-McGee Corporation" in the Information Statement is incorporated herein by
reference.
(b)-(c) The information set forth under "Special Factors -- Opinion of
Financial Advisor to the Board of Directors of Kerr-McGee Corporation" in the
Information Statement is incorporated herein by reference.
6
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ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a), (b) The information set forth under "Introduction" and "Special
Factors -- Background" in the Information Statement is incorporated herein by
reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES
The information set forth under "The Merger" in the Information Statement
is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION
(a), (b) The information set forth under "Special Factors -- Background"
and "Special Factors -- Purpose and Structure of the Merger" in the Information
Statement is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) The information set forth under "Special Factors -- No Appraisal
Rights" in the Information Statement is incorporated herein by reference.
(b) The information set forth under "Special Factors -- Other Unit Holder
Rights" in the Information Statement is incorporated herein by reference.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION
(a) The information set forth under "Selected Financial Data -- Sun Energy
Partners" in the Information Statement, in Sun Energy Partners' Annual Report on
Form 10-K for the year ended December 31, 1998, which is Part II in the
Information Statement, and in Sun Energy Partners' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, which is Part III in the Information
Statement, is incorporated herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a), (b) Not applicable.
ITEM 16. ADDITIONAL INFORMATION
The information set forth in the Information Statement is incorporated
herein by reference in its entirety.
ITEM 17. MATERIALS TO BE FILED AS EXHIBITS
(a) Not applicable.
(b)(1) Opinion of Lehman Brothers Inc. (included as Appendix B to Exhibit
(d)).
*(b)(2) Lehman Brothers Inc. Presentation to the Board of Directors of
Kerr-McGee Corporation on March 9, 1999
(c) Amended and Restated Agreement and Plan of Merger dated as of May
24, 1999 between Sun Energy Partners, L.P. and Kerr-McGee Energy
Corporation (included as Appendix A to Exhibit (d)).
(d) Information Statement of Sun Energy Partners, L.P. dated
[ ], 1999.
(e) Not applicable.
(f) Not applicable.
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* Previously filed.
7
<PAGE> 8
SIGNATURES
After due inquiry and to the best knowledge and belief of the undersigned,
the undersigned certify that the information set forth in this statement is
true, complete and correct.
KERR-MCGEE CORPORATION
By: /s/ TOM J. MCDANIEL
------------------------------------
Name: Tom J. McDaniel
Title: Vice Chairman
KERR-MCGEE L.P. CORPORATION
By: /s/ RUSSELL G. HORNER, JR.
------------------------------------
Name: Russell G. Horner, Jr.
Title: Vice President
KERR-MCGEE ENERGY CORPORATION
By: /s/ RUSSELL G. HORNER, JR.
------------------------------------
Name: Russell G. Horner, Jr.
Title: Vice President
SUN ENERGY PARTNERS, L.P.
By: Kerr-McGee Corporation, its
managing
general partner
By: /s/ TOM J. MCDANIEL
----------------------------------
Name: Tom J. McDaniel
Title: Vice Chairman
June 2, 1999
8
<PAGE> 9
EXHIBIT INDEX
(a) Not applicable.
(b)(1) Opinion of Lehman Brothers Inc. (included as Appendix B to Exhibit (d)).
*(b)(2) Lehman Brothers Inc. Presentation to the Board of Directors of
Kerr-McGee Corporation on March 9, 1999
(c) Amended and Restated Agreement and Plan of Merger dated as of May 24,
1999 between Sun Energy Partners, L.P. and Kerr-McGee Energy Corporation
(included as Appendix A to Exhibit (d)).
(d) Information Statement of Sun Energy Partners, L.P. dated
[ ], 1999.
(e) Not applicable.
(f) Not applicable.
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* Previously filed.
9
<PAGE> 1
PRELIMINARY COPY
SUN ENERGY PARTNERS, L.P.
123 ROBERT S. KERR AVENUE
OKLAHOMA CITY, OKLAHOMA 73102
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INFORMATION STATEMENT
------------------------
TO: HOLDERS OF LIMITED PARTNERSHIP UNITS OF SUN ENERGY PARTNERS, L.P.:
Pursuant to an Amended and Restated Agreement and Plan of Merger dated as
of May 24, 1999 between Sun Energy Partners and Kerr-McGee Energy Corporation, a
Delaware corporation which is an indirect wholly owned subsidiary of Kerr-McGee
Corporation, a Delaware corporation, Kerr-McGee Energy will be merged into Sun
Energy Partners and each outstanding partnership unit of Sun Energy Partners
(other than units held by Kerr-McGee Corporation and its affiliates) will be
converted solely into the right to receive $5.75 in cash per unit, without
interest (except that $1.23 of such amount will be subject to court approval of
the settlement described herein, and will be paid together with interest from
the date of the merger to the date of the court approval at the rate described
herein). As a result, Sun Energy Partners will become an indirect wholly-owned
subsidiary of Kerr-McGee Corporation.
The merger has been approved by Kerr-McGee Corporation, as the managing
general partner of Sun Energy Partners, and by Kerr-McGee Energy. Kerr-McGee
Corporation, as the holder of 100% of the general partnership interests and of
94.16% of the limited partnership units of Sun Energy Partners, has executed a
written consent approving the merger. The merger does not require the vote or
consent of any other unit holder. On [ ], 1999, the last trading day
prior to the date of this Information Statement, the high and low sales prices
for the depositary units were $[ ] and $[ ], respectively.
NO MEETING OF UNIT HOLDERS WILL BE HELD TO CONSIDER APPROVAL OF THE MERGER
OR THE MERGER AGREEMENT AND NO VOTE OR CONSENT OF UNIT HOLDERS IS BEING
SOLICITED.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Information Statement is , 1999.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 2
DOCUMENTS CONSTITUTING THIS INFORMATION STATEMENT........... 2
INTRODUCTION................................................ 2
PRICE RANGE OF DEPOSITARY UNITS; CASH DISTRIBUTIONS......... 3
SPECIAL FACTORS............................................. 3
Background............................................. 3
Purpose and Structure of the Merger.................... 5
Terms of the Merger; Conflicts of Interest............. 5
Reasons for the Merger................................. 6
Alternative Transactions Considered.................... 7
Fairness of the Merger................................. 8
Opinion of Financial Advisor to the Board of Directors
of Kerr-McGee Corporation............................. 10
Effect of the Merger on the Market for Units; NYSE
Listing and Securities Exchange Act Registration...... 16
Financing of the Merger................................ 17
No Appraisal Rights.................................... 17
Other Unit Holder Rights............................... 17
Material United States Federal Income Tax
Consequences.......................................... 18
Accounting Treatment................................... 18
Litigation............................................. 19
Term of the Partnership Agreement...................... 19
THE MERGER.................................................. 19
Terms of the Merger.................................... 19
CERTAIN CONTACTS AND TRANSACTIONS WITH AFFILIATES........... 22
SELECTED FINANCIAL DATA..................................... 23
Sun Energy Partners.................................... 23
Kerr-McGee Energy...................................... 23
CERTAIN PROJECTIONS......................................... 24
FEES AND EXPENSES........................................... 25
REGULATORY APPROVAL......................................... 25
</TABLE>
<TABLE>
<S> <C> <C>
SCHEDULE 1 -- DIRECTORS AND EXECUTIVE OFFICERS OF KERR-McGEE CORPORATION,
KERR-McGEE L.P. CORPORATION AND KERR-McGEE ENERGY
CORPORATION
APPENDIX A -- AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER DATED AS
OF MAY 24, 1999 BETWEEN SUN ENERGY PARTNERS, L.P. AND
KERR-McGEE ENERGY CORPORATION
APPENDIX B -- OPINION OF LEHMAN BROTHERS INC.
PART II -- SUN ENERGY PARTNERS' ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998
PART III -- SUN ENERGY PARTNERS' QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999
</TABLE>
i
<PAGE> 3
AVAILABLE INFORMATION
Sun Energy Partners is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports and
other information with the Securities and Exchange Commission. Such reports and
other information filed with the Commission can be inspected and copied at the
public reference facility maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Kerr-McGee Energy, Kerr-McGee Corporation, Kerr-McGee L.P. Corporation (a
Delaware corporation which is a wholly owned direct subsidiary of Kerr-McGee
Corporation and the direct parent of Kerr-McGee Energy) and Sun Energy Partners
have filed with the Commission a Rule 13e-3 Transaction Statement under the
Securities Exchange Act in connection with the merger. This Information
Statement also constitutes a part of such Rule 13e-3 Transaction Statement. The
Rule 13e-3 Transaction Statement and any amendments thereto, including exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
DOCUMENTS CONSTITUTING THIS INFORMATION STATEMENT
This Information Statement consists of the following three parts: (1) this
document, (2) Sun Energy Partners' Annual Report on Form 10-K for the year ended
December 31, 1998 attached as Part II hereof and (3) Sun Energy Partners'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 attached as
Part III hereof.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED.
INTRODUCTION
This Information Statement is being furnished in connection with the merger
to holders of record as of the close of business on May 24, 1999 of limited
partnership units of Sun Energy Partners, including holders of depositary units
represented by depositary receipts. As of the date of this Information
Statement, there are 129,171,100 limited partnership units outstanding held as
of such record date by approximately 1,384 unit holders of record, of which
121,628,000 or approximately 94.16% are owned by Kerr-McGee Corporation. In
addition, Kerr-McGee Corporation holds 100% of the general partnership interest
in Sun Energy Partners, for a combined total interest of approximately 98.2%.
Sun Energy Partners is engaged in the oil and gas exploration and
production business in the United States. Kerr-McGee Corporation is an energy
and chemical company with worldwide operations. Kerr-McGee L.P. is a wholly
owned subsidiary of Kerr-McGee Corporation formed for the purpose of holding a
limited partner interest in Sun Energy Partners following the merger and has not
conducted any other business. Kerr-McGee Energy is a wholly owned subsidiary of
Kerr-McGee L.P. formed for the purpose of effecting the merger and has not
conducted any other business.
The principal executive offices of Sun Energy Partners, Kerr-McGee
Corporation, Kerr-McGee L.P. and Kerr-McGee Energy are each located at 123
Robert S. Kerr Avenue, Oklahoma City, Oklahoma 73102, and the telephone number
of each at such address is (405) 270-1313.
------------------------
2
<PAGE> 4
PRICE RANGE OF DEPOSITARY UNITS; CASH DISTRIBUTIONS
The depositary units are listed and traded on the New York Stock Exchange
under the symbol SLP. The following table sets forth, for the periods indicated,
the reported high and low sales prices for the depositary units.
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ----------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................. $5 5/8 $4 3/8 $4 3/4 $4 $4 1/2 $3 1/16
Second Quarter............................ $5 3/8 $4 1/4 $4 1/2 $3 5/16 $ [ ](a) $ [ ](a)
Third Quarter............................. $6 1/16 $5 1/8 $3 15/16 $2 9/16
Fourth Quarter............................ $5 5/8 $4 1/4 $4 1/16 $2 5/8
</TABLE>
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(a) Through [ ], 1999.
On October 14, 1998, the last full trading day prior to the announcement of
the merger of Oryx Energy Corporation (the prior managing general partner of Sun
Energy Partners) into Kerr-McGee Corporation, the high and low sales prices for
the depositary units on the New York Stock Exchange were $3 and $2 13/16,
respectively. On March 8, the last full trading day prior to the original
announcement of the Sun Energy Partners merger for consideration of $4.52 per
unit, the high and low sales prices for the depositary units were $4 1/8 and $4,
respectively. On [ ], 1999, the last trading day prior to the date of
this Information Statement, the high and low sales prices for the depositary
units were $[ ] and $[ ], respectively. UNIT HOLDERS ARE URGED
TO OBTAIN A CURRENT MARKET QUOTATION FOR THE DEPOSITARY UNITS.
Since January 1, 1997, the quarterly cash distributions per unit paid to
unit holders were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
First Quarter............................................... $.15 $.02 --
Second Quarter.............................................. .08 -- $ [](a)
Third Quarter............................................... .02 --
Fourth Quarter.............................................. -- --
</TABLE>
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(a) Through [ ], 1999.
Sun Energy Partners funds its capital outlays from internally generated
funds, including cash proceeds from asset sales, and makes distributions of only
that cash remaining after such outlays. Any such distributions will fluctuate
due to oil and gas prices, production volumes, operating costs and the timing
and amount of capital expenditures and divestment proceeds.
SPECIAL FACTORS
BACKGROUND
Sun Energy Partners was formed in 1985 to succeed to all the domestic oil
and gas business and all the domestic oil and gas properties and related assets
of Sun Exploration and Production Company, a wholly-owned subsidiary of Sun
Company, Inc., and certain of its affiliates. In 1988, Sun Company spun off Sun
Exploration to Sun Company's stockholders, resulting in Sun Exploration becoming
a publicly traded company independent of Sun Company. Thereafter, Sun
Exploration changed its name to Oryx Energy Company.
Oryx conducted substantially all of its domestic oil and gas exploration
and production business through Sun Energy Partners and through operating
limited partnerships in which Sun Energy Partners holds a 99% interest as the
sole limited partner and Oryx held a 1% interest as the general partner.
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On October 14, 1998, Kerr-McGee Corporation and Oryx entered into an
Agreement and Plan of Merger, pursuant to which, among other things, Oryx would
be merged into Kerr-McGee Corporation (Kerr-McGee Corporation prior to the Oryx
merger is referred to as "Old Kerr-McGee") and each share of Oryx common stock
outstanding immediately prior to the Oryx merger and a related reverse stock
split by Oryx would be converted into 0.369 shares of Kerr-McGee common stock
(the "Oryx merger"). In the course of the negotiations relating to the Oryx
merger, Kerr-McGee Corporation considered whether to seek to effect the Sun
Energy Partners merger simultaneously with the Oryx merger. To avoid
complicating and possibly delaying the Oryx merger, Kerr-McGee Corporation
decided to defer consideration of the Sun Energy Partners merger until after the
completion of the Oryx merger.
On February 26, 1999, Oryx was merged into Old Kerr-McGee and Kerr-McGee
Corporation became the managing general partner of and succeeded to Oryx's
general and limited partnership interests in Sun Energy Partners and the
operating partnerships.
Kerr-McGee Corporation, in its capacity as managing general partner of Sun
Energy Partners, retained Lehman Brothers Inc. as financial advisor in
connection with the consideration of the Sun Energy Partners merger. Prior to a
meeting of the Kerr-McGee Corporation board of directors on March 9, 1999,
Lehman Brothers preliminarily advised Kerr-McGee Corporation of its view that
cash consideration in the range of $4.08 to $5.03 per unit would be fair to the
public unit holders from a financial point of view. At the March 9 board of
directors of meeting, management of Kerr-McGee Corporation recommended that the
board of directors authorize the merger on behalf of Kerr-McGee Corporation, as
managing general partner of Sun Energy Partners. Management further recommended
that, despite the decrease in oil and gas prices and stock prices of oil and gas
companies subsequent to the announcement on October 14, 1998 of the Oryx merger,
the board of directors set the Sun Energy Partners merger consideration at $4.52
per unit. This was a level that would give the public unit holders a 50.7%
premium over the $3.00 closing trading price of a depositary unit on October 14,
1998 equal in percentage terms to the 50.7% premium received by Oryx
stockholders in the Oryx merger (based on the closing trading prices of Oryx
common stock and Kerr-McGee common stock on October 14, 1998 and the exchange
ratio in the Oryx merger).
Lehman Brothers presented its analysis regarding the transaction and then
delivered its opinion that the cash consideration of $4.52 per unit was fair to
the public unit holders from a financial point of view. (For a description of
the qualifications of Lehman Brothers, the reasons Lehman Brothers was selected
by Kerr-McGee Corporation to act as financial advisor, recent material
relationships and contacts between Lehman Brothers and Kerr-McGee Corporation,
and other matters regarding Lehman Brothers' opinion, see "-- Opinion of
Financial Advisor to the Board of Directors of Kerr-McGee Corporation".) After
discussion, the non-employee members of the Kerr-McGee Corporation board of
directors, acting for Kerr-McGee Corporation as managing general partner of Sun
Energy Partners, resolved to approve the merger and the merger agreement and to
set the merger consideration at $4.52 per unit.
Kerr-McGee Energy also authorized the merger and the merger agreement and
Kerr-McGee Energy and Sun Energy Partners entered into the merger agreement.
Kerr-McGee Corporation, as the holder of 100% of the general partnership
interests and 94.16% of the outstanding limited partnership units of Sun Energy
Partners, executed a written consent approving the merger and the merger
agreement.
Following the announcement of the merger, three purported class action
lawsuits were filed by several unit holders against, among others, Sun Energy
Partners and Kerr-McGee Corporation. Among other things, the plaintiffs alleged
that the defendants breached fiduciary and common law duties by failing to offer
a fair price to unit holders in the merger, failing to negotiate the purchase
price at arm's-length, failing to obtain an independent evaluation of the units
and of Sun Energy Partners, and timing the merger to take advantage of the
alleged depressed market price of the units. The plaintiffs also alleged that
the $4.52 per unit merger consideration was unfair because it did not reflect
the significant increases in oil and gas prices, and in the trading values of
oil and gas company stocks generally, which occurred subsequent to March 9,
1999. See "-- Litigation."
On May 24, 1999, as a result of arm's-length negotiations with counsel for
the plaintiffs in the lawsuits, Sun Energy Partners, Kerr-McGee Corporation and
the other defendants entered into a
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<PAGE> 6
memorandum of understanding with the plaintiffs contemplating a settlement in
which the merger consideration would be increased to $5.75 per unit, subject to
court approval of the settlement (plus interest on such increase from the date
of the merger to the date of such approval), and certain other modifications
would be made to the terms of the merger as described under "-- Litigation."
Unit holders will be notified by press release and by mail of final court
approval of the settlement. Kerr-McGee Corporation, in its capacity as managing
general partner of Sun Energy Partners, and Kerr-McGee Energy then approved such
changes and entered into an amended and restated merger agreement providing for
such increased merger consideration and such other modifications. See
"-- Litigation." Kerr-McGee Corporation, as the holder of 100% of the general
partnership interests and 94.16% of the outstanding limited partnership units of
Sun Energy Partners, executed a written consent approving the increased merger
consideration and such amended and restated merger agreement.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the merger is for Kerr-McGee Corporation to acquire the
approximately 1.8% equity interest in Sun Energy Partners it does not already
hold. Kerr-McGee Corporation wants to avoid conflicts of interest that otherwise
might arise out of the fact that Kerr-McGee Corporation and Sun Energy Partners
operate in some of the same areas of the United States. Kerr-McGee Corporation
also believes that the existence of a public minority ownership interest in Sun
Energy Partners will limit its flexibility in operating and growing its
business, including by limiting Kerr-McGee Corporation's ability to engage in
cash management activities and other affiliate transactions that may require
special consideration of the public minority interest. In addition, Kerr-McGee
Corporation is endeavoring to avoid the administrative costs and burdens of
separate financial and tax accounting, reporting and disclosure requirements for
Sun Energy Partners.
Because Kerr-McGee Corporation owns all of the outstanding general
partnership interests and 94.16% of all outstanding limited partnership units of
Sun Energy Partners, under the Sun Energy Partners partnership agreement and
Delaware law, Kerr-McGee Corporation has the right to approve, and has approved,
the merger and the merger agreement with respect to Sun Energy Partners without
the consent of any other unit holder.
Sun Energy Partners expects that the merger will be consummated on [INSERT
DATE THAT IS 20 DAYS AFTER THE MAILING DATE] or as promptly as practicable
thereafter, assuming that the conditions to the merger set forth in the merger
agreement have been satisfied or waived. See "The Merger -- Terms of the
Merger."
Kerr-McGee Corporation is considering the possibility of an internal
reorganization following the merger, including possibly merging Sun Energy
Partners into another subsidiary of Kerr-McGee Corporation, or distributing Sun
Energy Partners' assets to another Kerr-McGee Corporation subsidiary through
liquidation or otherwise. Otherwise, and except as described above, Kerr-McGee
Corporation, Kerr-McGee L.P., Kerr-McGee Energy and Sun Energy Partners have no
present plans or proposals that would relate to or result in: any extraordinary
corporate transaction, such as a merger, reorganization or liquidation,
involving Sun Energy Partners or its subsidiaries; a sale or transfer of a
material amount of assets of Sun Energy Partners or its subsidiaries; any change
in Sun Energy Partners' management; any material change in Sun Energy Partners'
distribution rate or policy or indebtedness or capitalization; or any other
material change in Sun Energy Partners' structure or business.
TERMS OF THE MERGER; CONFLICTS OF INTEREST
Kerr-McGee Corporation, as managing general partner of Sun Energy Partners,
has determined the terms of the merger, including the consideration to be
received by the public unit holders for their limited partnership units. In
determining the terms of the merger, Kerr-McGee Corporation considered its
fiduciary duty to its stockholders, its business objective of consolidating
Oryx's oil and gas exploration and production business with that of Old
Kerr-McGee and its duty as managing general partner to structure a transaction
that is fair to the public unit holders. The directors and officers of
Kerr-McGee Corporation have a fiduciary duty to manage Kerr-McGee Corporation in
the best interests of its stockholders. At the same time, Kerr-McGee
Corporation, as the managing general partner of Sun Energy Partners, has a duty
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<PAGE> 7
to manage Sun Energy Partners in a manner that is fair to the public unit
holders. Accordingly, Kerr-McGee Corporation has a conflict of interest in
determining the terms of the merger. As described below in "-- No Appraisal
Rights," the partnership agreement provides that, when the managing general
partner has a conflict of interest in determining a course of conduct for Sun
Energy Partners, the managing general partner should consider the relative
interests of the parties to the conflict, the benefits and burdens relating to
such interests, customary industry practice and generally accepted accounting
and engineering principles. Consistent with these provisions, the non-employee
members of the Kerr-McGee Corporation board of directors, acting for Kerr-McGee
Corporation in its capacity as managing general partner of Sun Energy Partners,
determined the original merger consideration of $4.52 per unit and approved the
original merger and the original merger agreement. In addition, the Kerr-McGee
Corporation board of directors received an opinion from its financial advisor
that the original merger consideration of $4.52 per unit was fair to the public
unit holders from a financial point of view. Subsequent negotiations with the
counsel for the plaintiffs in the unit holder litigation resulted in an increase
of the merger consideration on May 24, 1999 to $5.75 per unit in cash (plus an
interest component on such increase), subject to court approval of the
settlement. See "-- Litigation."
Although Kerr-McGee Corporation believes that the terms of the original
merger were fair to the public unit holders, such terms were not the result of
arm's-length negotiations. No special committee or other entity was formed or
engaged to negotiate on behalf of the public unit holders, although, as
previously discussed, the original merger and the original merger agreement were
approved solely by Kerr-McGee Corporation's non-employee directors. However,
Kerr-McGee Corporation believes that the subsequent negotiations with the
plaintiffs' counsel was effectively an arm's-length negotiation regarding the
merger, since the plaintiffs' counsel represented the interests of the plaintiff
unit holders in the purported class action lawsuits. See "-- Fairness of the
Merger", "-- Opinion of Financial Advisor to the Board of Directors of
Kerr-McGee Corporation" and "-- Litigation" for a discussion of the
determination of the fairness of the terms of the merger, of the opinion
rendered by the financial advisor to Kerr-McGee Corporation with respect to the
fairness of the original merger consideration of $4.52 per unit to the public
unit holders from a financial point of view and of the unit holder litigation
and settlement negotiations which resulted in the increased merger
consideration, subject to court approval of the settlement.
REASONS FOR THE MERGER
Avoidance of Conflicts of Interest
Kerr-McGee Corporation conducts businesses similar to that of Sun Energy
Partners through other Kerr-McGee Corporation affiliates. The conduct of these
other businesses, and the allocation of business opportunities and capital
investments between Sun Energy Partners and these other businesses, may give
rise to conflicts of interest. These conflict situations will be eliminated
through the merger.
Elimination of Minority Interest
In addition to the conflicts of interest concerns expressed above,
Kerr-McGee Corporation believes that the existence of a public minority
ownership interest in a subsidiary is not advisable because it represents a
constituency that may have interests different from or in addition to those of
Kerr-McGee Corporation and its stockholders. The existence of the minority
interest will limit Kerr-McGee Corporation's flexibility in operating and
growing its exploration and production business by, among other things, limiting
Kerr-McGee Corporation's ability to contribute and distribute cash freely to and
from Sun Energy Partners as it may with its other subsidiaries and precluding
Kerr-McGee Corporation from allocating resources, managing operations and
engaging in other affiliate transactions with Sun Energy Partners without regard
for the interests of public unit holders. The merger will result in Sun Energy
Partners becoming a wholly-owned subsidiary of Kerr-McGee Corporation, thereby
eliminating these concerns. See also "Avoidance of Conflicts of Interest."
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<PAGE> 8
Reduction of Administrative Costs and Burdens
Kerr-McGee Corporation is endeavoring to avoid the administrative costs and
burdens of separate financial and tax accounting, reporting and disclosure
requirements for Sun Energy Partners. These costs are estimated at approximately
$1 million for 1999. These requirements are different from and in addition to
those which are required for Kerr-McGee Corporation's wholly owned businesses
because the depositary units are publicly held and listed on the New York Stock
Exchange. In addition, the merger will eliminate complexities in allocating
resources and costs for overhead, personnel and other matters.
Timing
Kerr-McGee Corporation is effecting the merger as soon as practicable
following the consummation of the Oryx merger, the event which gave rise to the
foregoing considerations.
ALTERNATIVE TRANSACTIONS CONSIDERED
Kerr-McGee Corporation, as the holder of 98.2% of the ownership interests
in Sun Energy Partners, reviewed various alternative methods described below to
allow it to acquire the outstanding publicly-held units. Kerr-McGee Corporation
determined that none of the alternatives would provide for a timely transaction
fair to all public unit holders which could be effected with certainty and would
achieve the goals of efficiently combining the oil and gas businesses of
Kerr-McGee Corporation and Sun Energy Partners and eliminating conflicts of
interest. Certain of these alternative transactions, if pursued, may have
resulted in greater or lesser total consideration to the public unit holders
than they will receive in the merger. Kerr-McGee Corporation did not pursue any
of such alternative transactions and, therefore, cannot determine whether such
alternatives would actually have resulted in greater or lesser total
consideration to the public unit holders or quantify the extent, if any, to
which the total consideration to be received in any such transactions might have
exceeded the consideration to be received in the merger.
Kerr-McGee Corporation considered the possibility of making a cash tender
offer or stock exchange offer for the outstanding publicly held units followed
by a call of the remaining units as permitted under the Sun Energy Partners
partnership agreement. The partnership agreement provides that if less than
2,500,000 units are held by the public, Kerr-McGee Corporation has the right to
purchase all, but not less than all, of the outstanding units at a minimum price
equal to the greater of (a) the highest price paid by Kerr-McGee Corporation or
its affiliates for a limited partnership unit during the 90 days preceding the
mailing of the call exercise notice to the unit holders and (b) the average of
the closing prices of the units on the New York Stock Exchange for the 30 days
preceding the mailing of such notice. Kerr-McGee Corporation determined that a
tender or exchange offer was not desirable because it was uncertain that holders
would tender enough units to permit Kerr-McGee Corporation to exercise its call
right. In that event, a merger would still need to be effected subsequent to the
tender or exchange offer in order to complete the acquisition of the publicly
held interests in Sun Energy Partners. Thus, the alternative of a tender or
exchange offer presented both uncertainty and significant delay. Additionally,
an exchange offer was not selected because Kerr-McGee Corporation did not want
to issue securities, and because any unit holder who preferred to hold
Kerr-McGee securities could use the cash merger consideration to purchase such
securities on the open market.
Kerr-McGee Corporation also considered market purchases as a means of
acquiring sufficient publicly held units to permit it to exercise its call
right. However, given the historical trading volume of the public units,
Kerr-McGee Corporation believed it would take a number of years to acquire a
sufficient number of units through open-market purchases to permit it to
exercise its call right. This alternative would also result in public unit
holders receiving different consideration for their units, as opposed to the
merger which ensures that all holders receive identical consideration.
For the reasons already discussed, Kerr-McGee Corporation rejected the
alternative of continuing to operate Sun Energy Partners as it exists, with a
small public minority interest.
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Because Kerr-McGee Corporation owns 98.2% of the interests in Sun Energy
Partners and Sun Energy Partners' assets constitute a substantial part of the
assets acquired in the Oryx merger, all of which Kerr-McGee Corporation plans to
operate through its subsidiaries as a going concern, Kerr-McGee Corporation did
not consider the alternative of liquidating Sun Energy Partners, which would
have required the sale of some or all of such assets.
FAIRNESS OF THE MERGER
The merger consideration of $5.75 per unit (including $1.23 per unit which
is subject to court approval and interest thereon) was negotiated in
arm's-length settlement discussions with counsel representing unit holders in
three purported class action lawsuits. The $5.75 per unit merger consideration
represents a 27% increase over the original $4.52 per unit merger consideration
which was determined to be fair by Kerr-McGee Corporation in approving the
original merger on March 9, 1999 and a 42% premium over the $4.06 closing price
of a depository unit on March 8, 1999, the last trading day prior to
announcement of the original merger.
Kerr-McGee Corporation, as managing general partner, believes that the
terms of the original merger were fair to the public unit holders. In reaching
this conclusion, Kerr-McGee Corporation considered the following factors:
(1) The original merger consideration of $4.52 per unit would have
given the public unit holders a 50.7% premium over the $3.00 closing
trading price of a depositary unit on October 14, 1998, the trading day
prior to the announcement of the Oryx merger. This was the same percentage
premium received by the Oryx stockholders in the Oryx merger (based on the
closing trading prices for Oryx common stock and Kerr-McGee common stock on
October 14, 1998 and the exchange ratio in the Oryx merger). The exchange
ratio in the Oryx merger giving rise to the implied premium was negotiated
in an arm's length transaction between Oryx and Old Kerr-McGee, two
companies sophisticated and experienced in purchase and sale transactions
involving oil and gas properties. In addition, in connection with the Oryx
merger, both Oryx and Old Kerr-McGee received fairness opinions from their
financial advisors that the exchange ratio used in the Oryx merger was fair
to their shareholders from a financial point of view, based in part upon
the same methodologies used to value Sun Energy Partners in determining the
fairness of the original $4.52 merger consideration.
(2) In approving the original merger, Kerr-McGee Corporation
considered the then-current market price of the units and historical market
prices for the units during the past two years, including that the $4.52
original merger consideration represented an 11.3% premium over the $4.06
closing trading price of a depositary unit on March 8, 1999, the last
trading day prior to the announcement of the Sun Energy Partners merger, as
opposed to the 50.7% premium to the unit price on October 14, 1998
discussed above. However, Kerr-McGee Corporation believed that the unit
price was substantially affected following announcement of the Oryx merger
by anticipation that Kerr-McGee Corporation would acquire the Sun Energy
Partners units at a premium, based on the fact that the Sun Energy Partners
units closed at $3 11/16 following the Oryx merger announcement, up 23%
from the prior day's close. Further, the Sun Energy Partners units remained
at similar or higher levels (other than during a brief period in late 1998)
until the March 9, 1999 announcement of the Sun Energy Partners merger,
even though oil and gas prices and stock prices for most oil and gas
companies decreased during the same period. Accordingly, and despite the
decreases in such oil, gas and stock prices, Kerr-McGee Corporation
selected a merger consideration price which would yield a percentage
premium equal to that received in the Oryx merger based on what Kerr-McGee
Corporation viewed as the "unaffected" unit price on October 14, 1998, the
same date on which the corresponding Oryx merger premium was measured.
While the depositary units have at times traded at prices higher than the
merger consideration, the units also have traded at lower prices. See
"Price Range of Units; Cash Distributions."
(3) In approving the original merger, Kerr-McGee Corporation relied in
part upon the fairness opinion rendered by Lehman Brothers described in
"-- Opinion of Financial Advisor to the Board of
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<PAGE> 10
Directors of Kerr-McGee Corporation" that the original merger consideration
of $4.52 per unit was fair to the public unit holders from a financial
point of view.
(4) The merger will result in the liquidation of the unit holders'
interests for cash, an opportunity which might not otherwise be available
to all unit holders given the limited liquidity in the market for the
units. The average daily trading volume for the units over the three-month
period ended October 14, 1998, as well as over the three-month period ended
March 9, 1999, was in each case approximately 15,000 units, or
approximately 0.2% of the outstanding units held by the public. Based on
this trading activity, it would take the current unit holders approximately
500 trading days, or two years, to liquidate their current positions via
the public markets.
(5) As a result of the merger, the public unit holders will have no
further interest in the net book value, assets, net income, cash flow,
distributions or other future performance of, or any other equity interest
in, Sun Energy Partners and, therefore, will not be able to participate in
any future growth, or be subject to any future decline, of Sun Energy
Partners. At the same time, the interest of Kerr-McGee Corporation and its
affiliates in the equity, net book value, assets, net income, cash flow,
distributions and future performance of Sun Energy Partners will increase
from 98.2% to 100%.
(6) Unit holders are not entitled to appraisal rights in connection
with the merger. Accordingly, unit holders do not have the alternative of
dissenting from the merger and seeking a judicial determination of the fair
value of their units in lieu of accepting the merger consideration to be
paid in the merger. See "-- No Appraisal Rights."
(7) Kerr-McGee Corporation did not structure the merger to require
approval of a majority of unaffiliated unit holders. No vote of
unaffiliated unit holders is required in connection with the merger and no
vote is being solicited. Kerr-McGee Corporation holds all of the general
partnership interests and 94.16% of the outstanding limited partnership
units of Sun Energy Partners. Therefore, whether a majority of the
unaffiliated unit holders are in favor of the merger or not will have no
impact on the consummation of the merger or the consideration to be
received by unit holders in the merger.
(8) Although no unaffiliated representative was retained to act solely
on behalf of unaffiliated unit holders for the purpose of negotiating the
terms of the original merger or preparing a report concerning the fairness
of the original merger, the original merger was approved by, and the
original merger consideration of $4.52 per unit was determined by, the
non-employee directors of the Kerr-McGee Corporation board of directors,
acting in Kerr-McGee Corporation's capacity as managing general partner of
Sun Energy Partners. In addition, determination of and evaluation of the
fairness of the original cash merger consideration of $4.52 per unit was
based, in part, on a valuation of the assets and properties of Sun Energy
Partners using methodologies similar to those used in determining and
evaluating the fairness of the exchange ratio in the Oryx merger, which was
negotiated in an arm's-length transaction between Oryx and Old Kerr-McGee.
No independent party negotiated the terms of the original merger agreement
with Kerr-McGee Corporation on behalf of unaffiliated unit holders or
prepared a report on behalf of unaffiliated unit holders concerning the
fairness of the merger, although, as noted above, the increased merger
consideration was the result of arm's-length settlement negotiations with
counsel representing unit holders in three purported class action lawsuits.
(9) Kerr-McGee Corporation does not believe current net book value or
liquidation value per unit to be relevant to a determination of the
fairness of the merger consideration because Kerr-McGee Corporation intends
to continue to operate the business currently conducted by Sun Energy
Partners as a going concern and therefore Kerr-McGee Corporation evaluated
Sun Energy Partners on a going concern basis. The net book value per unit
of the Sun Energy Partners units was $2.62 as of December 31, 1998, which
is substantially lower than the going concern value of the units as
estimated by Lehman Brothers. See "-- Opinion of Financial Advisor to the
Board of Directors of Kerr-McGee Corporation -- Going Concern Analysis."
For the foregoing reasons, no analysis of the liquidation value of Sun
Energy Partners was performed.
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In view of the number and variety of factors considered, Kerr-McGee
Corporation did not find it practicable to, and did not, assign relative weights
to the factors described above. However, Kerr-McGee Corporation believes that
the factors described in (1), (2), (3), (4), parts of (5) and (8), and (9) above
were favorable to its determination of fairness and factors (6), (7) and parts
of (5) and (8) were not favorable to such determination. Notwithstanding factors
(5), (6), (7) and (8), Kerr-McGee Corporation believes that the terms of the
original merger were fair to public unit holders. During the period from the
delivery of the Lehman Brothers opinion and execution of the original merger
agreement on March 9, 1999 to the execution of the revised merger agreement on
May 24, 1999 as a result of settlement negotiations, there were substantial
increases in oil and gas prices and in the trading values of oil and gas company
stocks generally. Such increases were one basis for the plaintiffs' complaints
in the unit holder litigation, and Kerr-McGee Corporation believes that they
were fully taken into account by plaintiffs' counsel in the settlement
negotiations. Because the increase in the merger consideration (subject to court
approval) was a result of arm's-length settlement negotiations, Kerr-McGee
Corporation did not and does not intend to obtain or request an updated fairness
opinion from Lehman Brothers in connection with the revised merger in light of
such increases or otherwise.
Kerr-McGee Corporation believes that the procedures by which the terms of
the original merger were determined and the original merger was approved were
likewise fair: (1) the original merger was approved by the nonemployee directors
of Kerr-McGee Corporation, acting for Kerr-McGee Corporation in its capacity as
managing general partner of Sun Energy Partners; (2) the board of directors of
Kerr-McGee Corporation retained Lehman Brothers to render an opinion concerning
the fairness, from a financial point of view, of the consideration to be
received by the unit holders in the original merger; and (3) the determination
of the original merger consideration was based upon the percentage premium
received by Oryx stockholders in the Oryx merger, which premium resulted from
arm's-length negotiations between Oryx and Old Kerr-McGee. The procedures
resulting in the increase of the merger consideration, subject to court
approval, consisted of arm's-length settlement negotiations with counsel
representing unit holders in three purported class action lawsuits. See
"-- Litigation."
Each of Sun Energy Partners, Kerr-McGee Energy and Kerr-McGee L.P. believe
the terms of the original merger were fair for the same reasons discussed above.
OPINION OF FINANCIAL ADVISOR TO THE BOARD OF DIRECTORS OF KERR-MCGEE CORPORATION
Kerr-McGee Corporation, in its capacity as managing general partner of Sun
Energy Partners, engaged Lehman Brothers to act as Kerr-McGee Corporation's
financial advisor in connection with the merger and instructed Lehman Brothers
to evaluate the fairness, from a financial perspective, to the public unit
holders of the consideration to be paid to such public unit holders in the
original merger. Lehman Brothers has delivered its opinion, dated March 9, 1999,
to the Kerr-McGee Corporation board of directors, acting in Kerr-McGee
Corporation's capacity as managing general partner of Sun Energy Partners, to
the effect that as of such date and based upon and subject to certain matters
stated therein, from a financial point of view, the cash consideration of $4.52
per unit to be received by the public unit holders in the original merger was
fair to the unit holders.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS IS INCLUDED AS
APPENDIX B TO THIS DOCUMENT, AND IS INCORPORATED HEREIN BY REFERENCE. UNIT
HOLDERS MAY READ SUCH OPINION FOR A DISCUSSION OF THE ASSUMPTIONS MADE, FACTORS
CONSIDERED AND LIMITATIONS UPON THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN
RENDERING ITS OPINION. THE FOLLOWING IS A SUMMARY OF LEHMAN BROTHERS' OPINION
AND THE METHODOLOGY LEHMAN BROTHERS USED TO RENDER ITS FAIRNESS OPINION.
No limitations were imposed by Kerr-McGee Corporation, acting in its
capacity as managing general partner of Sun Energy Partners, on the scope of
Lehman Brothers' investigation or the procedures to be followed by Lehman
Brothers in rendering its opinion. In arriving at its opinion, Lehman Brothers
did not ascribe a specific range of values to Sun Energy Partners but made its
determination as to the fairness of the consideration to be received by the unit
holders in the original merger on the basis of the financial and comparative
analyses described below. Lehman Brothers' advisory services and opinion were
provided for
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the information and assistance of Kerr-McGee Corporation, acting in its capacity
as managing general partner of Sun Energy Partners, in connection with its
consideration of the original merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
(1) the original merger agreement and the specific terms of the
original merger;
(2) publicly available information concerning Sun Energy Partners and
Kerr-McGee Corporation that Lehman Brothers believed to be relevant to its
analysis, including, without limitation, each of the periodic reports and
proxy statements filed by Sun Energy Partners and Kerr-McGee Corporation
since January 1, 1998, including the audited and unaudited financial
statements included in such reports and statements;
(3) financial and operating information with respect to the corporate
structure, businesses, operations and prospects of Sun Energy Partners as
furnished to Lehman Brothers by Kerr-McGee Corporation, including financial
projections based on the respective business plans of Sun Energy Partners
and, in particular:
(a) certain estimates of proved and non-proved reserves; and
(b) projected annual production of such reserves;
(4) a trading history of Sun Energy Partners units from December 31,
1995 to March 8, 1999, and a comparison of that trading history with those
of other companies that Lehman Brothers deemed relevant;
(5) a comparison of the historical financial results and present
financial condition of Sun Energy Partners with those of other companies
that Lehman Brothers deemed relevant; and
(6) a comparison of the financial terms of the original merger with
the financial terms of certain other transactions that Lehman Brothers
deemed relevant.
In addition, Lehman Brothers:
(a) had discussions with the management of Kerr-McGee Corporation
concerning Sun Energy Partners' corporate structure, business, operations,
financial condition, reserves, production profile, exploration program,
assets and prospects; and
(b) undertook such other studies, analyses and investigations as
Lehman Brothers deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and further relied upon the assurances of management of
Kerr-McGee Corporation that they were not aware of any facts or circumstances
that would make such information inaccurate or misleading. With respect to the
financial projections of Sun Energy Partners, upon the advice of the management
of Kerr-McGee Corporation, Lehman Brothers assumed that such projections had
been reasonably prepared on a basis reflecting the then best currently available
estimates and judgments of the management of Kerr-McGee Corporation as to the
future financial performance of Sun Energy Partners and that Sun Energy Partners
would perform substantially in accordance with such projections. In arriving at
its opinion, Lehman Brothers did not conduct a physical inspection of the
properties and facilities of Sun Energy Partners and did not make or obtain from
third parties any evaluations or appraisals of the assets or liabilities of Sun
Energy Partners. Lehman Brothers' opinion necessarily is based upon market,
economic and other conditions as they existed on, and could be evaluated as of,
the date of its opinion letter.
In connection with rendering its opinion, Lehman Brothers performed certain
financial, comparative and other analyses as described below. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and, therefore, such an
opinion is not
11
<PAGE> 13
readily susceptible to summary description. Furthermore, in arriving at its
fairness opinion, Lehman Brothers did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying the opinion. In its analyses, Lehman Brothers
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Sun Energy Partners or Kerr-McGee Corporation. Any estimates contained in the
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as set
forth therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold.
Valuation Analysis
Lehman Brothers prepared a valuation of Sun Energy Partners. In determining
valuation, Lehman Brothers used the following methodologies: discounted cash
flow analysis, comparable company trading analysis, comparable transactions
analysis, going concern analysis and segment valuation analysis. Each of these
methodologies was used to generate a reference enterprise value range for Sun
Energy Partners. The enterprise value range was adjusted for appropriate on- and
off-balance sheet assets and liabilities to arrive at an equity value range (in
aggregate dollars and dollars per unit). The per unit equity value ranges were
then used to evaluate the $4.52 per unit consideration to be received by the
unit holders in the original merger. The implied per unit equity values derived
using the various valuation methodologies described above all supported the
conclusion that the $4.52 per unit consideration to be received by the unit
holders was fair to the unit holders from a financial point of view.
The various valuation methodologies noted above and the implied per unit
equity values derived therefrom are included in the following table. This table
should be read together with the more detailed descriptions set forth below. The
table alone does not constitute a complete description of the financial and
comparative analyses. In particular, in applying the various valuation
methodologies to the particular businesses, operations and prospects of Sun
Energy Partners, and the particular circumstances of the merger, Lehman Brothers
made qualitative judgments as to the significance and relevance of each
analysis. In addition, Lehman Brothers made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Sun Energy Partners or
Kerr-McGee Corporation. Accordingly, the methodologies and the per unit equity
values derived therefrom as set forth in the table must be considered as a whole
and in the context of the narrative description of the financial analyses,
including the assumptions underlying these analyses. Considering the implied per
unit equity values without considering the narrative description of the
financial analyses, including the assumptions underlying these analyses, could
create a misleading or incomplete view of the process underlying, and
conclusions represented by, Lehman Brothers' opinion.
<TABLE>
<CAPTION>
IMPLIED EQUITY
VALUATION METHODOLOGY SUMMARY DESCRIPTION OF VALUATION METHODOLOGY VALUE PER UNIT
- --------------------- -------------------------------------------- --------------
<S> <C> <C>
DISCOUNTED CASH FLOW ANALYSIS Net present valuation of after-tax cash $4.08 - $5.03
flows generated by proved reserves using
selected hydrocarbon pricing scenarios and
discount rates plus evaluation of probable
reserves and other assets and liabilities
COMPARABLE COMPANY TRADING ANALYSIS Market valuation benchmark based on the $4.08 - $5.27
common stock trading multiples of selected
comparable companies for selected financial
and asset-based measures
COMPARABLE TRANSACTIONS ANALYSIS Market valuation benchmark based on $4.20 - $5.50
consideration paid in selected comparable
transactions
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
IMPLIED EQUITY
VALUATION METHODOLOGY SUMMARY DESCRIPTION OF VALUATION METHODOLOGY VALUE PER UNIT
- --------------------- -------------------------------------------- --------------
<S> <C> <C>
GOING CONCERN ANALYSIS Net present valuation of management $4.32 - $5.15
projections of after-tax cash flows using
selected hydrocarbon pricing scenarios and
discount rates and assumed capital programs
and finding costs
SEGMENT VALUATION ANALYSIS Build up of total enterprise value based on $3.96 - $5.15
the valuation of each geographic business
segment (onshore and offshore) determined by
reference to the discounted cash flow
analysis, comparable company trading
analysis and comparable transactions
analysis performed with respect to each
geographic segment
CONSIDERATION TO BE RECEIVED BY THE PUBLIC UNIT HOLDERS IN THE ORIGINAL MERGER..... $4.52
</TABLE>
Discounted Cash Flow Analysis. Lehman Brothers estimated the present value
of the future after-tax cash flows expected to be generated from Sun Energy
Partners' proved reserves as of January 1, 1999 based on reserves, production
cost estimates and a range of discount rates and assuming a tax rate of 35%, all
as provided by and discussed with Kerr-McGee Corporation management. Lehman
Brothers added to such estimated values for proved reserves assessments of the
value of certain other assets and liabilities of Sun Energy Partners, including
possible and probable reserves and other land and acreage, under three oil and
gas price scenarios ("Modified Management Case," "Banker Case," "Lehman Brothers
Research Case," collectively, the "Pricing Scenarios"). These assessments were
made by Lehman Brothers based on information provided by Kerr-McGee Corporation
management and on various industry benchmarks and assumptions provided by and
discussed with Kerr-McGee Corporation management.
The oil price forecasts in the Pricing Scenarios were based on New York
Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices.
Adjustments were made to the oil price forecasts to reflect location and quality
differentials. In the Modified Management Case, the unadjusted WTI oil prices
per barrel for the years 1999 to 2002 were assumed to be $13.50, $14.50, $15.00
and $15.50, respectively, and were assumed to remain at that price thereafter
without any escalation. In the Banker Case, the unadjusted WTI oil prices per
barrel for the years 1999 to 2003 were assumed to be $14.00, $15.00, $16.00,
$17.00 and $18.00, respectively, and were assumed to escalate at 2% per annum
thereafter. In the Lehman Brothers Research Case, the unadjusted WTI oil prices
per barrel for the years 1999 to 2003 were assumed to be $13.95, $16.50, $17.50,
$20.40 and $21.34, respectively, and were assumed to escalate at 3% per annum
thereafter.
The gas price forecasts in the Pricing Scenarios were based on NYMEX (Henry
Hub, Louisiana delivery) price forecasts from which adjustments were made to
reflect location and quality differentials. In addition, adjustments to the
forecasted NYMEX prices were made to reflect the value per thousand cubic feet
of gas. NYMEX gas price quotations are stated in heating value equivalents per
million British Thermal Units ("MMBtu"). In the Modified Management Case, the
unadjusted gas prices per MMBtu for the years 1999 to 2002 were assumed to be
$2.25, $2.35, $2.45 and $2.55, respectively, and were assumed to remain at that
price thereafter without any escalation. In the Banker Case, the unadjusted gas
prices per MMBtu for the years 1999 to 2003 were assumed to be $2.25, $2.35,
$2.40, $2.45 and $2.50, respectively, and were assumed to escalate at 2% per
annum thereafter. In the Lehman Brothers Research Case, the unadjusted gas
prices per MMBtu for the years 1999 to 2003 were assumed to be $2.25, $2.20,
$2.25, $2.35 and $2.42, respectively, and were assumed to escalate at 3% per
annum thereafter.
The discounted cash flow analysis resulted in implied per unit equity
values ranging from $4.08 to $5.03. The consideration of $4.52 per unit to be
received by the unit holders in the original merger fell within this range.
13
<PAGE> 15
Comparable Company Trading Analysis. Lehman Brothers reviewed the public
stock market trading multiples for selected large capitalization exploration and
production companies including Burlington Resources Inc., Devon Energy
Corporation, Ocean Energy, Inc., Pioneer Natural Resources Company, and Vastar
Resources, Inc. Using publicly available information, Lehman Brothers calculated
and analyzed the adjusted capitalization multiples of certain historical and
projected financial and operating criteria such as earnings before interest,
taxes, depreciation, depletion, amortization and exploration expenses ("EBITDE")
and proved reserves. The adjusted capitalization of each company was obtained by
adding its long-term debt to the sum of the market value of the common equity,
the value of its preferred stock (market value if publicly traded, liquidation
value if not) and the book value of any minority interest minus the cash
balance. The appropriate 1998, projected 1999 and projected 2000 EBITDE multiple
ranges were determined to be 6.0x to 7.0x, 5.5x to 6.5x and 5.0x to 6.0x,
respectively. Proved reserve multiple ranges were determined to be $4.00 to
$6.00 per barrel of oil equivalent ("BOE") and $0.70 to $1.00 per thousand cubic
feet of gas equivalent ("Mcfe").
This methodology yielded valuations for Sun Energy Partners that implied a
per unit equity value range of $4.08 to $5.27. The consideration of $4.52 per
unit to be received by the unit holders in the original merger fell within this
range.
Because of the inherent differences between the corporate structure,
businesses, operations and prospects of Sun Energy Partners and the corporate
structure, businesses, operations and prospects of the companies included in the
comparable company groups, Lehman Brothers believed that it was inappropriate
to, and therefore did not, rely solely on the quantitative results of the
analysis and, accordingly, also made qualitative judgments concerning
differences between the financial and operating characteristics of Sun Energy
Partners and the companies in the comparable company groups that would affect
the public trading values of Sun Energy Partners and such comparable companies.
Comparable Transactions Analysis. Lehman Brothers reviewed certain
publicly available information on selected transactions which were announced or
took place from July of 1996 to March of 1999 including, but not limited to,
Santa Fe Energy Resources, Inc./Snyder Oil Company, Ocean Energy, Inc./ Seagull
Energy Corporation, Kerr-McGee Corporation/Oryx Energy Company, Ocean Energy,
Inc./United Meridian Corporation, Sonat Inc./Zilkha Energy Company, Chesapeake
Energy Corporation/Hugoton Energy Corporation, Belco Oil & Gas Corp./Coda
Energy, Inc., Burlington Resources Inc./Louisiana Land and Exploration Company,
Louis Dreyfus Natural Gas Corp./American Exploration Company, MESA Inc./Parker &
Parsley Petroleum Company, Conoco Inc./TransTexas Gas Corporation Lobo Trend
natural gas properties and Seagull Energy Corporation/Global Natural Resources,
Inc. For each transaction, relevant transaction multiples were analyzed
including the total purchase price (equity purchase price plus assumed
obligations) divided by:
(1) latest twelve month ("LTM") EBITDE; and
(2) proved oil and natural gas reserves on a BOE basis and a Mcfe
basis.
The appropriate LTM EBITDE multiple ranges were determined to be 5.5x to
7.5x. The appropriate proved reserve multiple ranges were determined to be $4.00
to $6.00 per BOE and $0.70 to $1.00 per Mcfe, respectively.
This methodology yielded valuations for Sun Energy Partners that implied
per unit equity values ranging from $4.20 to $5.50. The consideration of $4.52
per unit to be received by the unit holders in the original merger fell within
this range.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of Sun
Energy Partners and the acquired businesses analyzed, Lehman Brothers believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis and, accordingly, also made qualitative
judgments concerning differences between the characteristics of these
transactions and the merger that would affect the acquisition values of Sun
Energy Partners and such acquired companies.
14
<PAGE> 16
Going Concern Analysis. Lehman Brothers prepared an after-tax cash flow
model for Sun Energy Partners utilizing information and projections provided by
Kerr-McGee Corporation. Lehman Brothers used discount rates of 10% to 12% and
terminal value EBITDE multiples of 4.5x to 5.5x. The discount rates used were
based on Lehman Brothers' review of the financial terms of similar transactions
in the sector of exploration and production companies with a focus onshore in
Texas, Oklahoma and Louisiana and in the Gulf of Mexico. The year-5 terminal
value multiples were selected by reference to current trading multiples of
similar publicly traded companies and to recently completed or proposed
acquisitions of similar assets and companies.
This methodology yielded a valuation of Sun Energy Partners implying a
range of per unit equity values of $4.32 to $5.15. The consideration of $4.52
per unit to be received by the unit holders in the original merger fell within
this range.
Segment Valuation Analysis. Lehman Brothers performed a discounted cash
flow analysis, comparable company trading analysis and comparable transactions
analysis of the segmented operations of Sun Energy Partners utilizing
information and projections provided by Kerr-McGee Corporation. Lehman Brothers
segmented Sun Energy Partners' operations into the geographic segments of
onshore domestic and the Gulf of Mexico. The segment enterprise value ranges
calculated were added together to calculate an enterprise value range for Sun
Energy Partners.
The segment valuation analysis resulted in implied per unit equity values
ranging from $3.96 to $5.15. The consideration of $4.52 per unit to be received
by the unit holders in the original merger fell within this range.
Historical Trading Analysis. Lehman Brothers reviewed the daily historical
closing prices of Sun Energy Partners units for the period from December 31,
1995 to March 8, 1999, including the closing price of the Sun Energy Partners
units on October 14, 1998 (the trading day before the announcement of the Oryx
merger) and March 8, 1999 (the trading day before the announcement of the Sun
Energy Partners merger). Lehman Brothers calculated the Sun Energy Partners
closing unit prices based on 5-day, 10-day, 20-day, 30-day, 60-day, 120-day,
240-day and 360-day averages as of March 8, 1999. The following table summarizes
such historical trading analysis:
<TABLE>
<CAPTION>
PREMIUM BASED
ON $4.52 PER
UNIT PRICE IN
THE ORIGINAL
UNIT PRICE MERGER
---------- -------------
<S> <C> <C>
March 8, 1999............................... $4.06 11.3%
5-Day Average............................... $4.08 10.9%
10-Day Average.............................. $3.92 15.3%
20-Day Average.............................. $3.82 18.4%
30-Day Average.............................. $3.86 17.1%
60-Day Average.............................. $3.64 24.2%
120-Day Average............................. $3.56 27.0%
240-Day Average............................. $3.63 24.4%
360-Day Average............................. $3.98 13.6%
October 14, 1998............................ $3.00 50.7%
</TABLE>
Premiums Analysis. Lehman Brothers reviewed certain publicly available
information on selected exploration and production transactions in which units
held by unaffiliated limited partner unit holders were acquired by the managing
general partner in order to calculate the premium paid by the managing general
partner to the unaffiliated limited partner unit holders. These transactions
included, but were not limited to, Valero Natural Gas Partners L.P./Valero
Natural Gas Company, Enserch Exploration Partners/Enserch Corporation, Diamond
Shamrock Offshore L.P./Meridian Offshore Inc., Santa Fe Energy Partners
L.P./Santa Fe Energy Resources, Inc. The following table summarizes the premiums
paid by the managing general partner to the unaffiliated limited partner unit
holders in those selected
15
<PAGE> 17
transactions. Lehman Brothers noted that the $4.52 per unit cash consideration
to be received by the public unit holders in the original merger represented a
50.7% premium to the unit price of $3.00 per unit on October 14, 1998 (the
trading day prior to the announcement of the Oryx merger).
<TABLE>
<CAPTION>
PERCENTAGE PREMIUM TO THE
PRICE AS OF DAY(S) PRIOR TO
TRANSACTION ANNOUNCEMENT
-----------------------------
1-DAY 5-DAYS 30-DAYS
------ ------- --------
<S> <C> <C> <C>
SELECTED TRANSACTIONS
Median...................................................... 1.0% 1.6% 22.6%
High........................................................ 18.0% 32.6% 36.3%
Low......................................................... (3.0)% (0.3)% 5.5%
PREMIUM TO BE RECEIVED BY THE PUBLIC UNIT HOLDERS IN THE
ORIGINAL MERGER........................................... 11.3% 13.0% 14.8%
</TABLE>
Lehman Brothers is an internationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Kerr-McGee
Corporation, acting in its capacity as managing general partner of Sun Energy
Partners, selected Lehman Brothers because of its expertise, reputation and
familiarity with Sun Energy Partners and because its investment banking
professionals have substantial experience in transactions comparable to the
merger.
Lehman Brothers has previously rendered certain financial advisory and
investment banking services to Kerr-McGee Corporation for which it has received
customary compensation, including serving as financial advisor to Kerr-McGee
Corporation in connection with the Oryx merger and in connection with Kerr-McGee
Corporation's acquisition of producing properties in the North Sea from Gulf
Canada Resources Limited in May 1998, and serving as lead manager in connection
with Kerr-McGee Corporation's issuance of $300 million of debt securities in
late 1997. Pursuant to the terms of an engagement letter agreement, dated
February 23, 1999, between Lehman Brothers and Kerr-McGee Corporation, acting in
its capacity as managing general partner of Sun Energy Partners, Kerr-McGee
Corporation paid Lehman Brothers $500,000 upon delivery of the fairness opinion.
In addition, Kerr-McGee Corporation, acting in its capacity as managing general
partner of Sun Energy Partners, has agreed to reimburse Lehman Brothers for its
reasonable expenses (including, without limitation, professional and legal fees
and disbursements) incurred in connection with its engagement, and to indemnify
Lehman Brothers and certain related persons against certain liabilities in
connection with its engagement, including certain liabilities which may arise
under federal securities laws.
In the ordinary course of its business, Lehman Brothers actively trades in
the debt and equity securities of Sun Energy Partners and Kerr-McGee Corporation
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities.
A copy of the full text of the written materials used in connection with
Lehman Brothers' March 9, 1999 presentation to the Kerr-McGee Corporation board
of directors will be made available for inspection and copying at the principal
executive offices of Sun Energy Partners and Kerr-McGee Corporation during
regular business hours by any interested unit holder or his or her
representative who has been so designated in writing.
EFFECT OF THE MERGER ON THE MARKET FOR UNITS; NYSE LISTING AND SECURITIES
EXCHANGE ACT REGISTRATION
As a result of the merger, the depositary units will cease to be
outstanding and will be delisted from the New York Stock Exchange, and the
registration of the depositary units under the Securities Exchange Act will be
terminated.
16
<PAGE> 18
FINANCING OF THE MERGER
The amount of funds needed to pay the aggregate merger consideration and
related fees and expenses will be approximately $46 million. See "Fees and
Expenses." Kerr-McGee Energy has obtained all of such funds relating to the
merger consideration through intercompany advances made to it by KM Investment
Corporation, a wholly-owned indirect subsidiary of Kerr-McGee Corporation. The
advances accrue interest at a variable rate announced by the Internal Revenue
Service as its Applicable Federal Rate, payment of which will be deferred until
following completion of the merger. Kerr-McGee Corporation will be responsible
for paying all fees and expenses relating to the transaction. See "Fees and
Expenses."
NO APPRAISAL RIGHTS
Holders of units do not have appraisal rights in connection with the
merger. The partnership agreement does not provide for appraisal rights. Sun
Energy Partners is a Delaware limited partnership and the partnership agreement
provides that the partnership agreement shall be construed in accordance with
and governed by the laws of the State of Delaware. Kerr-McGee Corporation is not
aware of any provisions of Delaware law expressly providing rights to holders of
interests in a Delaware limited partnership in lieu of appraisal rights.
Delaware law provides that the express terms of an agreement of limited
partnership preempt any fiduciary principles otherwise applicable. The
partnership agreement provides that in resolving any conflict of interest, the
managing general partner shall consider the relative interests of each party to
such conflict, agreement, transaction or situation and the benefits and burdens
relating to such interests, any customary or accepted industry practices, and
any applicable generally accepted accounting or engineering practices or
principles. In the absence of bad faith by the managing general partner, the
resolution, action or terms so made, taken or provided by the managing general
partner shall not constitute a breach of the partnership agreement or a breach
of any standard of care or duty imposed by any agreement or under the Delaware
Revised Uniform Limited Partnership Act or any other applicable law, rule or
regulation. The partnership agreement further provides that, unless otherwise
expressly provided in the partnership agreement, a partnership agreement with
respect to any operating partnership or any other agreement contemplated
therein, any provision contained in the partnership agreement shall control to
the fullest extent possible if it is in conflict with such standard of care or
duty, the Delaware Revised Uniform Limited Partnership Act or any other
applicable law, rule or regulation, and each limited partner waives such
standard of care or duty and the Delaware Revised Uniform Limited Partnership
Act or any other applicable law, rule or regulation and agrees that the same
shall be modified and/or waived to the extent necessary to permit the managing
general partner to act as described above in this paragraph.
OTHER UNIT HOLDER RIGHTS
Pursuant to the Sun Energy Partners partnership agreement, each limited
partner has the right, for a proper purpose reasonably related to such limited
partner's interest in Sun Energy Partners, upon two days written demand and
under oath directed to Sun Energy Partners at the principal office thereof
stating the purpose thereof, and at such partner's own expense, to inspect and
copy during the regular business hours of Sun Energy Partners at its principal
place of business such books and records of Sun Energy Partners as are just and
reasonable, subject to certain exceptions. Pursuant to the depositary agreement
with respect to the depositary units, each record holder of a depositary unit or
another limited partnership unit has the right to inspect the books kept by the
recordkeeping transfer agent for the transfer of depositary receipts and
depositary units, upon two business days written notice to the transfer agent of
such holder's desire to inspect such books, provided that such inspection shall
not be for the purpose of communicating with holders of depositary receipts in
the interest of a business or object other than the business of Sun Energy
Partners or a matter related to the depositary agreement or the depositary
receipts.
17
<PAGE> 19
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Unit Holders
The following discusses the material United States federal income tax
consequences of the merger to unit holders that are United States persons. A
"United States person" is a unit holder who is one of the following: a citizen
or resident of the United States; a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States; an estate, the income of which is subject to
United States federal income taxation regardless of its source; any trust if a
court within the United States is able to exercise primary supervision over the
administration of such trust and one or more United States persons have the
authority to control all the substantial decisions of such trust; or a trust
that has a valid election in effect under applicable Treasury regulations to be
treated as a United States person.
This summary does not discuss the tax consequences that might be relevant
to unit holders that are subject to special treatment under United States
federal income tax law including, without limitation, banks, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, tax-exempt investors, or foreign investors. In
addition, this summary does not include any description of any tax consequences
arising out of the tax laws of any state, local or foreign jurisdiction. You
should consult your own tax advisor regarding the tax consequences of the merger
to you.
Upon completion of the merger, a unit holder will generally recognize gain
or loss, for federal income tax purposes in an amount equal to the difference
between the amount realized by the unit holder in the merger and the unit
holder's aggregate tax basis in its units. Except as provided in section 751 of
the Internal Revenue Code of 1986, as amended (the "Code"), if a unit holder
holds its units as a capital asset, any gain or loss recognized will be capital
gain or loss. The capital gain or loss will be long-term capital gain or loss if
the unit holder has held its units for more than one year at the time of the
merger. Long-term capital gains of individuals are taxed at a maximum rate of
20%. The deductibility of capital losses is subject to certain limitations.
A unit holder will recognize ordinary income for federal income tax
purposes to the extent that the amount realized by the unit holder in the merger
is attributable to (i) unrealized receivables, as defined in section 751(c) of
the Code or (ii) inventory items, as defined in section 751(d) of the Code.
Backup Withholding
Certain noncorporate unit holders may be subject to backup withholding at a
31% rate on cash received in the merger. Backup withholding will not apply,
however, to a unit holder who furnishes a correct taxpayer identification number
and certifies that he or she is not subject to backup withholding and otherwise
complies with the applicable requirements of the Treasury Regulations.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES
TO A PARTICULAR UNIT HOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN,
EACH UNIT HOLDER SHOULD CONSULT A PERSONAL TAX ADVISOR CONCERNING THE
APPLICABILITY OF ANY FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
MERGER.
Other Consequences
Sun Energy Partners, Kerr-McGee Corporation and its other affiliates will
not recognize gain or loss for federal income tax purposes as a result of the
merger.
ACCOUNTING TREATMENT
The effective acquisition by Kerr-McGee Corporation of the public unit
holders' approximately 1.8% interest in Sun Energy Partners will be accounted
for as a purchase.
18
<PAGE> 20
LITIGATION
Three purported class action lawsuits entitled Kaplan v. Sun Energy
Partners, L.P., Greenfield v. Sun Energy Partners, L.P. and Feldbaum v. Sun
Energy Partners, L.P. were filed in Delaware Chancery Court by several unit
holders with respect to the original merger. The complaints in these actions, as
amended, name as defendants Sun Energy Partners, Kerr-McGee Corporation and
directors of Kerr-McGee Corporation. Among other things, the plaintiffs alleged
that the defendants have breached fiduciary and common law duties or aided and
abetted such breaches by failing to offer a fair price to unit holders in the
merger, failing to maximize the consideration received by unit holders for their
units, failing to negotiate the purchase price at arms-length, not obtaining an
independent valuation of the units and of Sun Energy Partners, not employing
various other procedures designed to ensure fairness to the unit holders, and
otherwise seeking to enrich themselves to the detriment of the unit holders. The
plaintiffs further alleged that the merger was timed to take advantage of the
alleged depressed market price of the units and of oil and natural gas generally
and that the purchase price is grossly inadequate relative to the market price
of the units prior to the announcement of the merger and the premium paid in
Kerr-McGee Corporation's merger with Oryx. The plaintiffs also alleged that the
original $4.52 per unit merger consideration was unfair because it did not
reflect the significant increases in oil and gas prices, and in the trading
values of oil and gas company stocks generally, which occurred subsequent to
March 9, 1999. These lawsuits seek unspecified damages and costs and to enjoin
or rescind the merger, among other things.
On May 24, 1999, as a result of arm's-length negotiations with counsel for
the plaintiffs in the lawsuits, Sun Energy Partners, Kerr-McGee Corporation and
the other defendants entered into a memorandum of understanding with the
plaintiffs contemplating a settlement in which the merger consideration would be
increased to $5.75 per unit, subject to final, non-appealable court approval of
the settlement (plus interest on such increase from the date of the merger to
the date of such approval). Additionally, the settlement provided that the
merger agreement would be amended to delete a provision allowing Kerr-McGee
Energy the unilateral right to abandon the merger at any time prior to its
consummation. The settlement also provides that the defendants will not oppose a
request by plaintiffs' counsel for court approval of not more than $1,350,000 in
fees and not more than $50,000 in documented out-of-pocket expenses to be paid
by Kerr-McGee Corporation. If the settlement does not receive final,
non-appealable court approval, then the unit holders will be entitled to receive
only the base merger consideration of $4.52 per unit in the merger, and not the
additional $1.23 per unit or the interest thereon contemplated by the
settlement. If the settlement does receive court approval, Kerr-McGee
Corporation will issue a press release to such effect and unit holders will
receive notification and be entitled to payment of the additional merger
consideration and interest promptly following such approval becoming final and
non-appealable.
The defendants expressly deny that there is any basis for the claims in the
lawsuits. However, in recognition of the costs and diversion of management time
which would be incurred if the matter were fully litigated to a conclusion, they
have determined that it is in the best interests of Kerr-McGee Corporation, Sun
Energy Partners and the other defendants to settle the lawsuits at this time.
TERM OF THE PARTNERSHIP AGREEMENT
Sun Energy Partners' partnership agreement provides that the partnership
will continue in existence until December 31, 2035 or until the earlier
termination of the partnership in accordance with the partnership agreement.
THE MERGER
TERMS OF THE MERGER
Merger Consideration
At the effective time of the merger, each outstanding unit (other than
units held by Kerr-McGee Corporation or any of its affiliates) will be converted
solely into the right to receive the merger
19
<PAGE> 21
consideration of $5.75 per unit in cash, without interest (except that $1.23 of
such amount will be subject to court approval of the settlement described
herein, and will be paid together with interest from the date of the merger to
the date of the court approval at the rate described herein), less any required
withholding taxes and all such units will automatically cease to be outstanding
and will be canceled and retired and cease to exist.
Effective Time
The merger will become effective at the time a Certificate of Merger is
duly filed with the Secretary of State of the State of Delaware in accordance
with the Delaware General Corporation Law and the Delaware Revised Uniform
Limited Partnership Act or at such other time as may be specified in the
Certificate of Merger. Provided the conditions to the merger have been satisfied
or waived, it is anticipated that the merger will be consummated on [INSERT DATE
20 DAYS AFTER MAILING] or as promptly as practicable thereafter.
Parties; Surviving Entity
In the merger, Kerr-McGee Energy will be merged into Sun Energy Partners,
whereupon the separate existence of Kerr-McGee Energy will cease. Sun Energy
Partners will be the surviving entity in the merger and will continue its
existence under the laws of the State of Delaware. At the election of Kerr-McGee
Corporation, any direct or indirect wholly owned subsidiary of Kerr-McGee
Corporation may be substituted for Kerr-McGee Energy as a party in the merger.
Conditions to the Merger
The obligations of Kerr-McGee Energy and Sun Energy Partners to effect the
merger are each subject to the following conditions which must be satisfied or
waived:
- no statute, rule, regulation, executive order, decree, injunction or
other order, whether temporary, preliminary or permanent, shall have been
enacted, entered, promulgated or enforced by any court or governmental
authority which is in effect and has the effect of prohibiting the
consummation of the merger; provided that each of the parties shall have
used its best efforts to prevent the entry of any injunction or other
order and to appeal as promptly as possible any injunction or other order
that may be entered;
- there shall not be pending or threatened against Kerr-McGee Corporation,
Sun Energy Partners or Kerr-McGee Energy, or any of their affiliates,
property or businesses, any other action, suit or proceeding involving a
claim at law or in equity or before or by any federal, state, or
municipal or other government department, commission, board, bureau,
agency or instrumentality, domestic or foreign, relating to the merger or
the merger agreement that would be reasonably likely to have a material
adverse effect on the condition, financial or otherwise, of Kerr-McGee
Corporation, Sun Energy Partners or Kerr-McGee Energy;
- the parties shall have received any necessary governmental consents or
approvals and the waiting period, and any extension thereof, applicable
to the consummation of the merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if any, shall have expired or been
terminated;
- 20 days shall have elapsed from the date this Information Statement is
sent or given to unit holders; and
- Lehman Brothers' fairness opinion shall not have been withdrawn or
modified in any manner materially adverse to Kerr-McGee Corporation, Sun
Energy Partners or Kerr-McGee Energy.
20
<PAGE> 22
Procedures for Exchange of Depositary Units
Prior to the merger, Kerr-McGee Energy will appoint a bank or trust company
to act as disbursing agent for the payment of the merger consideration upon
surrender of certificates representing the depositary units. Promptly after the
merger, Sun Energy Partners will cause the disbursing agent to mail to each
person who was a record holder, as of the effective time of the merger, of an
outstanding certificate or certificates which immediately prior to the effective
time of the merger represented depositary units, a form of letter of transmittal
and instructions for use in effecting the surrender of such certificates in
exchange for payment of the merger consideration. The letter of transmittal
shall specify that delivery shall be effected, and risk of loss with respect to
the certificates representing depositary units shall pass, only upon proper
delivery of the certificates to the disbursing agent. Upon surrender to the
disbursing agent of a certificate representing depositary units, together with
such letter of transmittal duly executed and such other documents as may be
reasonably required by the disbursing agent, the holder of such certificate will
be paid in cash in an amount equal to the product of the number of units
represented by such certificate multiplied by the sum of (i) the base merger
consideration of $4.52 and (ii) if final court approval of the settlement
described under "Special Factors -- Litigation" above has been received,
additional merger consideration of $1.23 together with interest thereon from the
date of the merger to the date of such court approval at a per annum rate equal
to the yield on three-month Treasury bills, as reported in the Wall Street
Journal on the date the merger is consummated, and such certificate shall
forthwith be canceled. If the court approval is received after any holder of a
certificate has complied with the above procedures and received payment of the
base merger consideration of $4.52 per unit, then promptly following the court
approval such holder will be paid in cash in an amount equal to the product of
the number of units represented by such certificate multiplied by the additional
merger consideration of $1.23 together with interest thereon from the date of
the merger to the date of the court approval at the rate described above. If the
court fails to approve the settlement then neither the additional merger
consideration nor the interest thereon will be paid. Except as described above,
no interest will be paid or accrued on the cash payable upon the surrender of
the certificates representing depositary units.
At and after the effective time of the merger, there will be no
registration of transfers of units and Sun Energy Partners will instruct the
depositary for depositary units not to register transfers of depositary units.
From and after the effective time of the merger, the holders of units
outstanding immediately prior to the effective time of the merger shall cease to
have any rights with respect to such units except as otherwise provided in the
merger agreement or by applicable law.
At any time more than one year after the effective time of the merger, Sun
Energy Partners will be entitled to require the disbursing agent to deliver to
it any funds made available to the disbursing agent and not disbursed in
exchange for certificates representing depositary units. Thereafter, holders of
units will be entitled to look only to Sun Energy Partners, subject to abandoned
property, escheat and other similar laws, as general creditors thereof with
respect to any merger consideration that may be payable upon due surrender of
the certificates held by them. Neither Sun Energy Partners nor the disbursing
agent will be liable to any holder of a unit for any merger consideration
delivered to a public official pursuant to any abandoned property, escheat or
other similar law.
Effects of the Merger
As a result of the merger, each outstanding unit, other than units held by
Kerr-McGee Corporation or any of its affiliates, will be converted into the
right to receive the merger consideration, and all such units will automatically
cease to be outstanding. At the same time, the interest of Kerr-McGee
Corporation and its affiliates in the net book value, assets, net income, cash
flow, distributions and future performance of Sun Energy Partners will increase
from 98.2% to 100%.
The foregoing summary of the merger agreement is qualified in its entirety
by reference to the complete text of the merger agreement, a copy of which is
attached as Appendix A.
21
<PAGE> 23
CERTAIN CONTACTS AND TRANSACTIONS WITH AFFILIATES
As described above in "Special Factors -- Background," Old Kerr-McGee
recently completed a business combination with Oryx, which prior to such
business combination was the managing general partner and holder of all general
partnership interests and 94.16% of all outstanding limited partnership units in
Sun Energy Partners. The "managing general partner" refers to Oryx prior to
February 26, 1999 and to Kerr-McGee Corporation since February 26, 1999.
The managing general partner serves as Sun Energy Partners' lender and
borrower of funds and a clearing-house for the settlement of intercompany
receivables and payables. Deposits earn interest at a rate equal to the rate
paid by a major money market fund. Demand loans bear interest at a rate based on
the prime rate.
Sun Energy Partners is indebted to the managing general partner under a
9.75% note due 1999-2001. Repayment obligations under such note are
approximately $14 million in 1999, $16 million in 2000 and $8 million in 2001.
The managing general partner is reimbursed by Sun Energy Partners for all
direct costs incurred in performing management functions and indirect costs
(including payroll and payroll related costs and the cost of postemployment
benefits and management incentive plans) allocable to Sun Energy Partners. The
full cost of direct and indirect costs incurred on behalf of Sun Energy Partners
by the managing general partner is allocated to Sun Energy Partners based on
services rendered and extent of use. Such costs, which are charged principally
to production cost, exploration cost and general and administrative expense,
totaled $57 million, $61 million and $61 million for the years 1998, 1997 and
1996 and $11 million during the fiscal quarter ended March 31, 1999. The
managing general partner does not receive any carried interests, promotions,
back-ins or other similar compensation as the general partner of Sun Energy
Partners.
Interest income received from the managing general partner was earned on
advances to the managing general partner and totaled $3 million, $4 million and
$4 million during the years 1998, 1997 and 1996 and $1 million during the fiscal
quarter ended March 31, 1999.
Interest cost paid to the managing general partner was primarily incurred
on long-term debt and advances due the managing general partner and totaled $20
million, $14 million and $16 million during the years 1998, 1997 and 1996 and $4
million during the fiscal quarter ended March 31, 1999.
22
<PAGE> 24
SELECTED FINANCIAL DATA
SUN ENERGY PARTNERS
The following selected financial data relating to Sun Energy Partners has
been taken from its 1998 Annual Report on Form 10-K and its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999. The financial data set forth
below is qualified in its entirety by reference to such reports and other
documents, including the financial statements and related notes contained
therein.
<TABLE>
<CAPTION>
(UNAUDITED)
QUARTER ENDED
MARCH 31 YEAR ENDED DECEMBER 31
--------------- ----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Period
Revenues................. $ 106 $ 146 $ 523 $ 728 $ 686 $ 552 $ 613
Income (loss) before
cumulative effect of
accounting
change(1)............. $ 11 $ -- $ (44) $ 239 $ 248 $ 99 $ 100
Net income (loss)(1)..... $ 11 $ -- $ (44) $ 239 $ 248 $ 99 $ (477)
Net income (loss) per
unit before cumulative
effect of accounting
change(1)............. $ .03 $ -- $ (.10) $ .57 $ .59 $ .24 $ .24
Net income (loss) per
unit.................. $ .03 $ -- $ (.10) $ .57 $ .59 $ .24 $(1.13)
Cash distributions paid
to unit holders....... $ -- $ 9 $ 8 $ 105 $ 67 $ 194 $ 114
Cash distributions paid
per unit.............. $ -- $ .02 $ .02 $ .25 $ .16 $ .46 $ .27
Weighted average units
outstanding
(in thousands)........ 421.2 421.2 421.2 421.2 421.2 421.2 421.2
Capital expenditures..... $ 67 $ 155 $ 367 $ 410 $ 314 $ 206 $ 166
At End of Period
Total assets............. $1,428 $1,512 $1,374 $1,468 $1,299 $1,143 $1,181
Long-term debt(2)........ $ 20 $ 34 $ 24 $ 38 $ 52 $ 62 $ 74
Partners' capital........ $1,112 $1,145 $1,102 $1,154 $1,020 $ 839 $ 934
Book value per unit...... $ 2.64 $ 2.72 $ 2.62 $ 2.74 $ 2.42 $ 1.99 $ 2.22
</TABLE>
- ---------------
(1) Effective January 1, 1994, Sun Energy Partners adopted a new policy for
determining the ceiling test for its oil and gas properties. A one-time
non-cash charge of $577 million for the cumulative effect of the change was
recognized in the earnings for 1994. As a result of an impairment test
related to the application of Statement of Financial Accounting Standards
No. 121, Sun Energy Partners reported a non-cash write-down of assets of $75
million in the fourth quarter of 1998.
(2) Includes $20 million, $34 million, $24 million, $38 million, $51 million,
$62 million and $72 million of long-term debt due to the managing general
partner.
KERR-MCGEE ENERGY
The assets of Kerr-McGee Energy consist of approximately $43.4 million in
cash, obtained through intercompany advances from KM Investment Corporation, a
wholly-owned subsidiary of Kerr-McGee Corporation. Kerr-McGee Energy does not
have any liabilities, except its obligations under and in respect of the merger
agreement and in respect of such advances.
23
<PAGE> 25
CERTAIN PROJECTIONS
Sun Energy Partners and Kerr-McGee Corporation do not as a matter of course
make public forecasts or projections as to future revenues or results of
operations. However, during the course of Lehman Brothers' preparation of its
fairness opinion, as discussed under "Special Factors -- Background" and
"Special Factors -- Opinion of Financial Advisor to the Board of Directors of
Kerr-McGee Corporation", management of Kerr-McGee Corporation produced certain
financial information regarding Sun Energy Partners to representatives of Lehman
Brothers, including estimates of Sun Energy Partners' future financial
performance prepared by management of Kerr-McGee Corporation in February 1999 in
connection with its annual budget process. The projections presented below are
included only because they were made available to Lehman Brothers.
While presented with numerical specificity, the projections are
"forward-looking" and based upon numerous estimates and assumptions that are
inherently subject to significant uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond Sun Energy Partners'
control. Factors that could cause Sun Energy Partners' results to differ
materially from the results discussed in such forward-looking statements
include, but are not limited to, the following: general economic conditions,
production variances from expectations, volatility of oil and gas prices, the
need to develop and replace its reserves, the success of the oil and gas
exploration program, ultimate volume of recoverable oil and gas reserves, the
substantial capital expenditures required to fund its operations, exploration
uses, environmental risks, uncertainties about estimates of reserves,
competition, government regulation and political actions, and the ability of Sun
Energy Partners to implement its business strategy. Accordingly, there can be no
assurance that the projected results would be realized or that actual results
would not be significantly higher or lower than those predicted. In particular,
the projections were based on the following assumptions regarding oil and gas
prices: for New York Mercantile Exchanges ("NYMEX") West Texas Intermediate oil,
$13 per barrel in 1999 and $14 per barrel in 2000; and for NYMEX Henry Hub,
Louisiana delivery natural gas, $2.25 per million British Thermal Units in 1999
and $2.35 per MMBtu in 2000.
While such projections were prepared in good faith by management of
Kerr-McGee Corporation, no assurance can be made regarding future events.
Therefore, such projections cannot be considered a reliable predictor of future
operating results, and this information should not be relied on as such.
Additionally, the financial projections do not reflect revised prospects for Sun
Energy Partners, changes in general business and economic conditions, or any
other transaction or event that has occurred or may occur and that was not
anticipated at the time such information was prepared. Due to the speculative
nature of the projections, Kerr-McGee Corporation and Sun Energy Partners do not
assume responsibility for the ultimate outcome of the following projections. The
projections were prepared solely for internal use and not with a view toward
public disclosure or complying with either the published guidelines of the
Commission regarding projections or forecasts or the American Institute of
Certified Public Accountants' Guide for Prospective Financial Statements. The
projections do not purport to present operations in accordance with generally
accepted accounting principles, and Sun Energy Partners' independent auditors
have not examined, compiled or performed any procedures regarding these
projections, and accordingly, assume no responsibility for them. Unit holders
are cautioned not to place undue reliance on the projections.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 2000
----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C>
For the Period
Revenues.................................................. $500 $550
Net income before net interest expense.................... $154 $199
Capital expenditures...................................... $173 $127
</TABLE>
24
<PAGE> 26
FEES AND EXPENSES
It is estimated that the expenses incurred in connection with the payment
of the merger consideration and the merger will be approximately as set forth
below:
<TABLE>
<S> <C>
Filing Fees................................................. $ 8,675
Financial Advisory Fees and Expenses........................ 500,000
Accounting Fees and Expenses................................ 10,000
Disbursing Agent Fees and Expenses.......................... 30,000
Legal Fees.................................................. 400,000
Printing and Mailing Costs.................................. 35,000
Miscellaneous............................................... 5,000
-----------
Total:............................................ $ 988,675
===========
</TABLE>
Sun Energy Partners and Kerr-McGee Corporation will be responsible for all
of the foregoing fees and expenses. Brokers, dealers, commercial banks and trust
companies will, upon request only, be reimbursed by Kerr-McGee Corporation for
customary mailing and handling expenses incurred by them in forwarding material
to their customers.
REGULATORY APPROVAL
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. Early termination of
the waiting period under the HSR Act was granted effective April 7, 1999. Sun
Energy Partners is not aware of any other regulatory approvals required in
connection with the merger. If any other regulatory approvals are required,
Kerr-McGee Corporation and Sun Energy Partners intend to seek such approvals as
promptly as practicable.
25
<PAGE> 27
SCHEDULE 1 -- DIRECTORS AND EXECUTIVE OFFICERS OF KERR-MCGEE CORPORATION,
KERR-MCGEE L.P. CORPORATION AND KERR-MCGEE ENERGY CORPORATION
(Unless otherwise noted, each director's and officer's business address is c/o
Kerr-McGee Corporation, 123 Robert S. Kerr Avenue, Oklahoma City, Oklahoma 73102
and each is a United States citizen)
DIRECTORS AND EXECUTIVE OFFICERS OF KERR-MCGEE CORPORATION
<TABLE>
<CAPTION>
NAME, POSITION CURRENT AND RECENT BUSINESS EXPERIENCE
- -------------- --------------------------------------
<S> <C>
William E. Bradford Chairman, Halliburton Company, a provider of energy and
Director energy services, from 1998; Chairman and Chief Executive
Officer of Dresser Industries, Inc., now merged with
Halliburton Company, from 1996 to 1998; President and Chief
Operating Officer of Dresser Industries, Inc. from 1992 to
1995; Director, Ultramar/Diamond Shamrock, Inc.
George D. Christiansen Vice President since March 1998; Vice President,
Vice President, Safety Environmental Assessment and Remediation from January 1996
and Environmental to March 1998; Vice President, Minerals Exploration,
Hydrology and Real Estate, Safety and Environmental Affairs
Division from 1994 to 1996; Vice President, Exploration,
Minerals Exploration Division from 1980 to 1994.
Luke R. Corbett Chairman of the Board and Chief Executive Officer of
Chairman of the Board, Kerr-McGee Corporation since May 11, 1999 and from February
Chief Executive 1997 to February 26, 1999; Chief Executive Officer of
Officer and Director Kerr-McGee Corporation from February 27, 1999 to May 10,
1999; President and Chief Operating Officer from May 1995
through January 1997; Group Vice President from 1992 through
May 1995. Director, OGE Energy Corp and BOK Financial Corp.
Kenneth W. Crouch Senior Vice President of Kerr-McGee Corporation since 1996.
Senior Vice President Senior Vice President, Worldwide Exploration and Production
Operations, Kerr-McGee Oil & Gas Corporation since 1998.
Senior Vice President, Exploration, Kerr-McGee Oil & Gas
Corporation from 1996 to 1998. Senior Vice President, North
America and International Exploration, Exploration and
Production Division during 1996. Vice President, Gulf of
Mexico and International Exploration, Exploration and
Production Division from 1995 to 1996. Vice President and
Managing Director of Exploration for North Sea Operations,
Exploration and Production Division from 1993 to 1995.
Sylvia A. Earl Chair, Deep Ocean Exploration and Research, Inc. since 1992
Director and Explorer-in- Residence for the National Geographic
Society since 1998; Chair of the Sea Change Trust, a
non-profit scientific research organization from 1993 to
1995; Advisor to the Administrator from 1992 to 1993 and
Chief Scientist from 1990 to 1992 of the National Oceanic
and Atmosphere Administration.
David G. Genever-Watling Managing Director, SMG Management L.L.C., an investment
Director firm, since 1997; President and Chief Executive Officer from
1992 to 1995 of General Electric Industrial and Power
Systems.
Julius C. Hilburn Vice President, Human Resources since 1996; Manager,
Vice President, Human Benefits Administration from 1992 to 1996.
Resources
Russell G. Horner, Jr. Senior Vice President and Corporate Secretary of Kerr-McGee
Senior Vice President Corporation since 1997. General Counsel from 1986 to May 11,
and Corporate 1999. Vice President from 1986 to 1997.
Secretary
Martin C. Jischke President of Iowa State University since 1991. Director,
Director Bankers Trust Corporation.
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
NAME, POSITION CURRENT AND RECENT BUSINESS EXPERIENCE
- -------------- --------------------------------------
<S> <C>
Deborah A. Kitchens Vice President and Controller since 1996; Controller,
Vice President and Exploration and Production Division from 1992 to 1996.
Controller
John C. Linehan Executive Vice President and Chief Financial Officer of
Executive Vice Kerr-McGee Corporation since 1997. Chief Financial Officer
President since 1987. Senior Vice President from 1987 to 1997.
Director, BancFirst Oklahoma City.
Tom J. McDaniel Vice Chairman of Kerr-McGee Corporation since February,
Vice Chairman and 1997; Senior Vice President and Corporate Secretary from
Director 1989 through January 1997. Director, UMB Financial
Corporation and UMB Oklahoma Bank.
William C. Morris Chairman of the Board of J. & W. Seligman & Co.,
Director Incorporated; Chairman of the Board of Tri-Continental
Corporation and Chairman of the Boards of the companies in
the Seligman family of investment companies, all since
December 1988. Chairman of the Board of Carbo Ceramics,
Inc., since 1987.
John J. Murphy Managing Director, SMG Management L.L.C., an investment
Director firm, since January 1997; Chairman of the Board of Dresser
Industries, Inc., hydrocarbon energy products and services,
from 1983 through November 1996; Chief Executive Officer of
Dresser Industries, Inc., from 1983 to 1995. Director, Carbo
Ceramics, Inc.; PepsiCo Inc., W.R. Grace & Co. and Shaw
Industries.
Gregory F. Pilcher Vice President and General Counsel of Kerr-McGee Corporation
Vice President and since May 11, 1999. Deputy General Counsel for Business
General Counsel Transactions from December 1998 to 1999. Associate General
Counsel for Litigation and Civil Proceedings from 1997 to
1998. Assistant General Counsel for Litigation and Civil
Proceedings from 1996 to 1997. Senior Counsel for Major
Projects from 1994 to 1996.
John M. Rauh Treasurer since 1996; Vice President since 1987; Controller
Vice President and from 1987 to 1996.
Treasurer
Leroy C. Richie Chairman and Chief Executive Officer, Capitol Coatings
Director Technologies, Inc., since March 1999. President, Intrepid
World Communications from September 1998 to February 1999;
Vice President and General Counsel for Automotive Legal
Affairs, Chrysler Corporation, 1990 through December 1997.
Matthew R. Simmons President of Simmons & Company International, a specialized
Director investment banking firm that serves the worldwide energy
service industry, since founding the company in 1974.
Jean B. Wallace Vice President, General Administration since 1996; Vice
Vice President, President, Human Resources from 1989 to 1996.
General Administration
Farah M. Walters President and Chief Executive Officer of University
Director Hospitals Health System, Cleveland, Ohio since 1992.
Director, LTV Corporation and Geon Company.
Michael G. Webb Senior Vice President of Kerr-McGee Corporation since 1994.
Senior Vice President Senior Vice President, Exploration, Exploration and
Production Division from 1994 to 1996. Vice President,
Exploration from 1992 to 1993. Citizen of Canada.
Ian L. White-Thomson Chairman of U.S. Borax, Inc., a provider of borax and borate
Director products since 1996; President and Chief Executive Officer
from 1988 to 1999; Chief Executive Officer, Rio Tinto Borax
Ltd. since 1995. Director, KCET Community Television of
Southern California, LA Opera and 3D Systems Corp.
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
NAME, POSITION CURRENT AND RECENT BUSINESS EXPERIENCE
- -------------- --------------------------------------
<S> <C>
W. Peter Woodward Senior Vice President of Kerr-McGee Corporation since May
Senior Vice President 1997. Senior Vice President of Kerr-McGee Chemical
Corporation since May 1997. Senior Vice President, Chemical
Marketing of Kerr-McGee Chemical Corporation from May 1996
through May 1997. Director, Pigment Business Management of
Kerr-McGee Chemical Corporation from 1993 through April
1996.
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF
KERR-MCGEE L.P. CORPORATION AND KERR-MCGEE ENERGY CORPORATION
<TABLE>
<CAPTION>
NAME, POSITION CURRENT AND RECENT BUSINESS EXPERIENCE
- -------------- --------------------------------------
<S> <C>
Luke R. Corbett (see above)
President and Director
Russell G. Horner, Jr. (see above)
Vice President,
Secretary and Director
Tom J. McDaniel (see above)
Vice President and
Director
John M. Rauh (see above)
Vice President
and Treasurer
</TABLE>
28
<PAGE> 30
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 24, 1999
BETWEEN
SUN ENERGY PARTNERS, L.P.
AND
KERR-MCGEE ENERGY CORPORATION
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as of May 24, 1999
(the "Agreement"), between SUN ENERGY PARTNERS, L.P., a Delaware limited
partnership (the "Partnership"), and KERR-McGEE ENERGY CORPORATION, a Delaware
corporation (the "Company").
BACKGROUND
The Company and the Partnership are parties to an Agreement and Plan of
Merger, dated as of March 9, 1999 (the "Original Agreement"), providing, upon
the terms and subject to the conditions set forth therein, for the merger of the
Company into the Partnership (the "Original Merger"), whereby each outstanding
LP Unit (as defined in the Second Amended and Restated Agreement of Limited
Partnership of the Partnership, as amended (the "Partnership Agreement") not
owned by the Company or any of its affiliates will be converted into the right
to receive the merger consideration specified therein (the "Original Merger
Consideration").
There are currently pending in the Court of Chancery, County of New Castle,
State of Delaware (the "Court"), actions styled as class actions entitled
Kaplan, et al. v. Sun Energy Partners, L.P., et al., Del. Ch., C.A. No. 17063NC,
Greenfield, et al. v. Sun Energy Partners, L.P., et al., Del. Ch., C.A. No.
17096, and Feldbaum, et al. v. Sun Energy Partners, L.P., et al., Del. Ch., C.A.
No. 17141NC (collectively, the "Actions").
On May 24, 1999, the Company and the Partnership, among others, entered
into a Memorandum of Understanding (the "Memorandum of Understanding") with the
counsel for the plaintiffs in the Actions providing for the settlement of the
Actions including, among other things, the revisions to the Original Merger
Consideration and other terms of the Original Merger provided for herein. The
settlement contemplated by the Memorandum of Understanding is subject to the
Court entering an order approving the settlement and such order being finally
affirmed on appeal or no longer subject to appeal ("Final Court Approval").
The Board of Directors of the Company (the "Board of Directors") has
approved on behalf of the Company, and Kerr-McGee Corporation, a Delaware
corporation (the "Parent"), in its capacity as managing general partner of the
Partnership, has approved on behalf of the Partnership, upon the terms and
subject to the conditions set forth in this Agreement, the merger of the Company
into the Partnership (the "Merger"), whereby each outstanding LP Unit not owned
by the Company or any of its affiliates will be converted into the right to
receive the Merger Consideration (as hereinafter defined).
Pursuant to Section 17-211(b) of the DRULPA (as defined below), the Parent,
in its capacities as (i) the sole general partner of the Partnership and (ii)
the holder of more than 50% of the LP Units, has executed a written consent
approving the Merger.
<PAGE> 31
Now, therefore, the Partnership and the Company hereby agree that the
Original Agreement shall be amended and restated to read as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the Delaware General
Corporation Law (the "DGCL") and the Delaware Revised Uniform Limited
Partnership Act (the "DRULPA"), the Company shall be merged with and into the
Partnership as soon as practicable following the satisfaction or waiver of the
conditions set forth in Article IV. Following the Merger, the Partnership shall
continue as the surviving entity (the "Surviving Entity") and shall continue its
existence under the laws of the State of Delaware, and the separate existence of
the Company shall cease. At the election of the Parent, any direct or indirect
wholly-owned subsidiary of the Parent may be substituted for the Company as a
constituent party in the Merger.
SECTION 1.2 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article IV, but in no
event before a 20-day period shall have elapsed from the date of mailing to
holders of LP Units of an information statement with respect to the Merger, the
Merger shall be consummated by filing with the Secretary of State of the State
of Delaware a certificate of merger or other appropriate documents (in any case,
the "Certificate of Merger") in accordance with the DGCL and the DRULPA. The
Merger shall become effective at such time as the Certificate of Merger is duly
filed, or at such other time as the Partnership and the Company shall specify in
the Certificate of Merger (the time the Merger becomes effective being the
"Effective Time").
SECTION 1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL and Section 17-211 of the DRULPA.
SECTION 1.4 Certificate of Limited Partnership and Partnership
Agreement. The Certificate of Limited Partnership and the Partnership Agreement
of the Partnership shall be the certificate of limited partnership and
partnership agreement of the Surviving Entity until thereafter changed or
amended as provided therein or by applicable law.
SECTION 1.5 General Partner. The Parent shall be the managing general
partner of the Surviving Entity until the earlier of its resignation or removal
or until its successor is duly appointed or elected pursuant to the Partnership
Agreement.
SECTION 1.6 Conversion of Units. At the Effective Time, by virtue of the
Merger and without any action on the part of the Partnership, the Company or the
holders of any of the following securities:
(a) each LP Unit held by the Parent or any affiliate of the Parent
shall be canceled and retired and shall cease to exist, and no payment or
consideration shall be made with respect thereto;
(b) each issued and outstanding LP Unit, other than LP Units referred
to in paragraph (a) above, shall be converted into the right to receive
from the Surviving Entity an amount in cash equal to (i) $4.52, without
interest (the "Base Merger Consideration"), plus (ii) subject to receipt of
the Final Court Approval, an additional $1.23 together with interest
thereon from the Effective Time to the date of the Final Court Approval at
a per annum rate equal to the yield on three-month Treasury bills, as
reported in the Wall Street Journal on the date the Merger is consummated
(the "Additional Merger Consideration"; together with the Base Merger
Consideration, the "Merger Consideration"), in each case less any required
withholding taxes. At the Effective Time, all such LP Units shall cease to
be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such LP
Unit shall cease to have any rights with respect thereto, except the right
to receive the Merger Consideration, without interest; and
A-2
<PAGE> 32
(c) all of the issued and outstanding shares of capital stock of the
Company shall be converted into and become a number of LP Units equal to
the number of LP Units canceled and retired pursuant to paragraphs (a) and
(b) above.
ARTICLE II
EXCHANGE OF UNITS
SECTION 2.1 Exchange of Certificates.
(a) Prior to the Effective Time, the Company shall appoint a bank or
trust company to act as disbursing agent (the "Disbursing Agent") for the
payment of Merger Consideration upon surrender of certificates representing
the LP Units. The Company will enter into a disbursing agent agreement with
the Disbursing Agent, in form and substance reasonably acceptable to the
Company, and shall deposit or cause to be deposited with the Disbursing
Agent in trust for the benefit of the holders of LP Units cash in an
aggregate amount necessary to make the payments pursuant to Section 1.06 to
holders of LP Units (such amounts being hereinafter referred to as the
"Exchange Fund"). The Disbursing Agent shall, pursuant to irrevocable
instructions, make the payments provided for in the preceding sentence out
of the Exchange Fund. The Disbursing Agent shall invest portions of the
Exchange Fund as the Company directs, provided that such investments shall
be in obligations of or guaranteed by the United States of America, in
commercial paper obligations receiving the highest rating from either
Moody's Investors Service, Inc. or Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances
of commercial banks with capital exceeding $100 million. The Exchange Fund
shall not be used for any other purpose, except as provided in this
Agreement.
(b) Promptly after the Effective Time, the Surviving Entity shall
cause the Disbursing Agent to mail to each person who was a record holder
as of the Effective Time of an outstanding certificate or certificates
which immediately prior to the Effective Time represented Depositary Units
(as defined in the Partnership Agreement) representing LP Units (the
"Certificates"), and whose LP Units were converted into the right to
receive Merger Consideration pursuant to Section 1.06, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss with respect to the Certificates shall pass, only upon proper
delivery of the Certificates to the Disbursing Agent) and instructions for
use in effecting the surrender of the Certificate in exchange for payment
of the Merger Consideration. Upon surrender to the Disbursing Agent of a
Certificate, together with such letter of transmittal duly executed and
such other documents as may be reasonably required by the Disbursing Agent,
the holder of such Certificate shall be paid in exchange therefor cash in
an amount equal to the product of the number of LP Units represented by
such Certificate multiplied by (i) the Base Merger Consideration plus (ii)
if the Final Court Approval has been received, the Additional Merger
Consideration, and such Certificate shall forthwith be canceled. If the
Final Court Approval is received after payment of the Base Merger
Consideration is made to any holder of a Certificate pursuant to the
preceding sentence, then promptly after receipt of the Final Court Approval
such holder shall be paid cash in an amount equal to the product of the
number of LP Units represented by such Certificate multiplied by the
Additional Merger Consideration. No interest will be paid or accrued on the
cash payable upon the surrender of the Certificates (except to the extent
included in the Additional Merger Consideration). If payment is to be made
to a person other than the person in whose name the Certificate surrendered
is registered, it shall be a condition of payment that the Certificate so
surrendered be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment pay any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of the Certificate surrendered or establish to the
satisfaction of the Surviving Entity that such tax has been paid or is not
applicable. Until surrendered in accordance with the provisions of this
Section 2.01, each Certificate (other than Certificates representing LP
Units owned by the Parent or any affiliate of the Parent) shall represent
for all
A-3
<PAGE> 33
purposes only the right to receive the Merger Consideration in cash
multiplied by the number of LP Units represented by such Certificate,
without any interest thereon.
(c) At and after the Effective Time, there shall be no registration of
transfers of LP Units and the Partnership shall instruct the depositary for
the Depositary Units not to register transfers of the Depositary Units
which were outstanding immediately prior to the Effective Time. From and
after the Effective Time, the holders of LP Units outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to
such LP Units except as otherwise provided in this Agreement or by
applicable law. All cash paid upon the surrender of Certificates in
accordance with the terms of this Article II shall be deemed to have been
paid in full satisfaction of all rights pertaining to the LP Units
previously represented by such Certificates. If, after the Effective Time,
Certificates are presented to the Surviving Entity for any reason, such
Certificates shall be canceled and exchanged for cash as provided in this
Article II. At any time more than one year after the Effective Time, the
Surviving Entity shall be entitled to require the Disbursing Agent to
deliver to it any funds which had been made available to the Disbursing
Agent and not disbursed in exchange for Certificates (including, without
limitation, all interest and other income received by the Disbursing Agent
in respect of all such funds). Thereafter, holders of LP Units shall look
only to the Surviving Entity (subject to abandoned property, escheat and
other similar laws) as general creditors thereof with respect to any Merger
Consideration that may be payable, without interest, upon due surrender of
the Certificates held by them. Notwithstanding the foregoing, neither the
Surviving Entity nor the Disbursing Agent shall be liable to any holder of
an LP Unit for any Merger Consideration delivered in respect of such LP
Unit to a public official pursuant to any abandoned property, escheat or
other similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Each Party. Each of the
Company and the Partnership represent and warrant to the other that:
(a) such company is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and has the
requisite power and authority to carry on its respective business as now
conducted;
(b) such company has the requisite power and authority to enter into
this Agreement and to perform its obligations hereunder. The execution,
delivery and performance of this Agreement by such company and the
consummation of the transactions contemplated hereby have been duly
authorized by all requisite organizational action and no other
organizational proceeding is necessary therefor. This Agreement has been
duly executed and delivered by such company and constitutes the valid and
binding obligation of such company, enforceable against each such company
in accordance with its terms;
(c) neither the execution and delivery hereof by such company, nor the
consummation of the transactions contemplated hereby, nor compliance with
the provisions hereof will (A) violate or conflict with or result in the
breach of or default (whether following lapse of time or notice of both),
or terminate or accelerate any right or obligation, or create any lien upon
any property or assets of such company or any of its subsidiaries, under
any of the terms of (x) the organization documents of such company or its
subsidiaries or (y) any material debt or other agreement to which such
company or its subsidiaries or the assets or properties thereof may be
subject; or (B) violate any judgment, ruling, order, writ, injunction,
statute, rule or regulation applicable to such company; except in the case
of clauses (A) and (B) above, for such violations, conflicts, breaches,
defaults, terminations, accelerations or liens which, in the aggregate,
would not have a material adverse effect on the transactions contemplated
hereby or on the condition (financial or other), business or operations of
such company and its subsidiaries, taken as a whole. Other than under the
DRULPA, the DGCL, the
A-4
<PAGE> 34
federal securities laws, the "blue sky" regulations of various states, and
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, to the knowledge
of such company no notice to, filing with, or authorization of any domestic
or foreign public body or authority is required for the consummation of the
transactions contemplated hereby; and
(d) the Parent, as managing general partner of the Partnership, has
received the opinion of Lehman Brothers Inc. dated March 9, 1999, to the
effect that the consideration to be paid to the holders of the LP Units
(other than the Parent and any other holders of LP Units that are
affiliates of the Parent) in connection with the Original Merger was fair
to such holders of LP Units from a financial point of view as of such date
(the "Fairness Opinion").
SECTION 3.2 Additional Representations and Warranties of the
Partnership. The Partnership represents and warrants as follows: Since December
31, 1998, the business of the Partnership has not undergone any material adverse
change.
ARTICLE IV
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 4.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger are
subject to the satisfaction or waiver, prior to the Effective Time, of the
following conditions:
(a) no statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent), shall have
been enacted, entered, promulgated or enforced by any court or governmental
authority which is in effect and has the effect of prohibiting the
consummation of the Merger; provided that each of the parties shall have
used its best efforts to prevent the entry of any injunction or other order
and to appeal as promptly as possible any injunction or other order that
may be entered;
(b) there shall not be pending or threatened against the Partnership,
the Parent, or the Company, or any affiliate of the Partnership, the
Parent, or the Company, or the property or business of the Partnership, the
Parent, or the Company, any other action, suit or proceeding involving a
claim at law or in equity or before or by any federal, state, or municipal
or other government department, commission, board, bureau, agency or
instrumentality, domestic or foreign, relating to the Merger or this
Agreement that would be reasonably likely to have a material adverse effect
on the condition, financial or otherwise, of the Partnership, the Parent,
or the Company;
(c) the parties shall have received any necessary governmental
consents or approvals and the waiting period (and any extension thereof)
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, if any, shall have expired
or been terminated and a 20-day period shall have elapsed from the date of
mailing to holders of LP Units of an information statement with respect to
the Merger; and
(d) the Fairness Opinion shall not have been withdrawn or modified in
any manner materially adverse to the Parent, the Company or the
Partnership.
A-5
<PAGE> 35
ARTICLE V
MISCELLANEOUS
SECTION 5.1 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
SECTION 5.2 Entire Agreement; Assignment. This Agreement constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
Except as set forth in this Agreement, neither this Agreement nor any right,
interest or obligation under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise without the prior written consent of the
other parties.
SECTION 5.3 Validity. In the event any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby.
SECTION 5.4 Governing Law. This Agreement shall be governed by and
construed in accordance with the substantive laws of the State of Delaware
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.
SECTION 5.5 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 5.6 Parties in Interest. Nothing in this Agreement, express or
implied, is intended to confer upon any person other than the parties to this
Agreement any rights or remedies of any nature whatsoever under or by reason of
this Agreement.
SECTION 5.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement, and shall become effective when one
or more counterparts have been signed by each of the parties and delivered to
the other parties.
A-6
<PAGE> 36
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its respective officers thereunto duly authorized, all
as of the day and year first above written.
SUN ENERGY PARTNERS, L.P.
By: Kerr-McGee Corporation,
its Managing General Partner
By: /s/ RUSSELL G. HORNER, JR.
------------------------------------
Russell G. Horner, Jr.
Senior Vice President
KERR-McGEE ENERGY CORPORATION
By: /s/ JOHN M. RAUH
------------------------------------
John M. Rauh
Vice President
Signature Page of Amended and Restated Agreement and Plan of Merger dated
as of May 24, 1999 between Sun Energy Partners, L.P. and Kerr-McGee Energy
Corporation
A-7
<PAGE> 37
APPENDIX B
LEHMAN BROTHERS
March 9, 1999
Kerr-McGee Corporation
Kerr-McGee Center
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma 73102
Kerr-McGee Corporation, acting in its capacity as Managing General Partner of
Sun Energy Partners, L.P.:
We understand that Kerr-McGee Corporation (the "Company"), acting in its
capacity as Managing General Partner of Sun Energy Partners, L.P. ("SLP"), is
considering entering into a transaction (the "Proposed Transaction") pursuant to
which (i) SLP will merge with a newly-formed, wholly-owned indirect subsidiary
of the Company ("Newco") and (ii) each of the depository units representing
units of limited partnership interest in SLP that are held by holders
unaffiliated with the Company (the "Public Unitholders") will be converted into
the right to receive $4.52 per unit in cash. The terms and conditions of the
Proposed Transaction are set forth in more detail in the Agreement and Plan of
Merger dated March 9, 1999 between SLP and Newco (the "Agreement").
We have been requested by the Company, acting in its capacity as Managing
General Partner of SLP, to render our opinion with respect to the fairness, from
a financial point of view, to the Public Unitholders of the consideration to be
received by the Public Unitholders in the Proposed Transaction. We have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to proceed with or effect the Proposed
Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction; (2) such publicly available
information concerning the Company and SLP that we believe to be relevant to our
analysis, including, without limitation, each of the periodic reports and proxy
statements filed by the Company since January 1, 1998 and each of the periodic
reports filed by SLP since January 1, 1998 (including the audited and unaudited
financial statements of both the Company and SLP included in such reports and
statements); (3) financial and operating information with respect to the
business, operations and prospects of SLP furnished to us by the Company,
including financial projections based on the business plan of SLP, and, in
particular, (a) certain estimates of proved and non-proved reserves and (b)
projected annual production of such reserves; (4) a trading history of SLP's
units from December 31, 1995 to the present and a comparison of that trading
history with those of other companies that we deemed relevant; (5) a comparison
of the historical financial results and present financial condition of SLP with
those of other companies that we deemed relevant; and (6) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other transactions that we deemed relevant. In addition, we have had discussions
with the management of the Company concerning SLP's business, operations,
assets, financial condition, reserves, production profile, exploration program
and prospects and have undertaken such other studies, analyses and
investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of SLP, upon
advice of the Company we have assumed that such projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of SLP and that SLP will perform substantially in accordance with
such projections. In arriving at our opinion, we have not conducted a physical
inspection of the properties and facilities of SLP and have not made or obtained
any evaluations or appraisals of the assets or liabilities of SLP. Our opinion
necessarily is based upon market,
<PAGE> 38
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the Public Unitholders in the Proposed Transaction is fair to the
Public Unitholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services. In addition, the
Company has agreed to indemnify us for certain liabilities that may arise out of
the rendering of this opinion. We also have performed various investment banking
services for the Company in the past (including acting as financial advisor in
the Company's merger with Oryx Energy Company) and have received customary fees
for such services. In the ordinary course of our business, we actively trade in
the debt and equity securities of the Company for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Company, acting in its
capacity as Managing General Partner of SLP, and is rendered to the Company in
such capacity in connection with its consideration of the Proposed Transaction.
Very truly yours,
/s/ Lehman Brothers
LEHMAN BROTHERS
B-2
<PAGE> 39
PART II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K
<TABLE>
<CAPTION>
(MARK ONE)
<C> <S>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
<TABLE>
<C> <S>
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER 1-9033
------------------------------
SUN ENERGY PARTNERS, L.P.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2070723
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
123 ROBERT S. KERR AVENUE
OKLAHOMA, OK 73102
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code:
405-270-1313
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Depositary Units New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The aggregate market value of the Depositary Units held by nonaffiliates of
the Registrant as of February 28, 1999, was approximately $30 million.
The total number of Partnership Units outstanding as of February 28, 1999,
was 421,170,459.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 40
CERTAIN ABBREVIATIONS AND OTHER MATTERS
As used herein, the following terms have specific meanings:
<TABLE>
<C> <S>
m thousand
mm million
bbl barrel
mb thousand barrels
mmb million barrels
eb equivalent barrel
meb thousand equivalent barrels
mmeb million equivalent barrels
b/d barrels per day
bc/d barrels of condensate per
day
mcf thousand cubic feet
mmcf million cubic feet
bcf billion cubic feet
mmcf/d million cubic feet per day
mmcfe/d million cubic feet
equivalent per day
ED&A exploration, development
and acquisition*
FD&A finding, development and
acquisition per barrel
WTI West Texas Intermediate
spot price
HH Henry Hub spot price
</TABLE>
- ------------------------------
* ED&A outlays represent capital expenditures and cash exploration costs,
excluding capitalized interest.
Natural gas equivalents are determined under the relative energy content
method by using the ratio of 6 mcf of natural gas to 1 bbl of crude oil,
condensate or natural gas liquids.
With respect to information quoted as to working interest, "net" is
determined by multiplying the whole numbers by Sun Energy Partners, L.P.'s
working interest.
FORWARD-LOOKING STATEMENTS
In the following report, Sun Energy Partners, L.P. has included certain
statements (other than statements of historical fact) that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used
herein, the words "budget", "budgeted", "anticipate", "expects", "believes",
"seeks", "goals", "intends" or "projects" and similar expressions are intended
to identify forward-looking statements. It is important to note that Sun Energy
Partners, L.P.'s actual results could differ materially from those projected by
such forward-looking statements. Although Sun Energy Partners, L.P. believes the
expectations reflected in such forward-looking statements are reasonable and
such forward-looking statements are based upon the best data available at the
time this report is filed with the Securities and Exchange Commission, no
assurance can be given that such expectations will prove correct. Factors that
could cause Sun Energy Partners, L.P.'s results to differ materially from the
results discussed in such forward-looking statements include, but are not
limited to, the following: production variances from expectations, volatility of
oil and gas prices, the need to develop and replace its reserves, the
substantial capital expenditures required to fund its operations, exploration
uses, environmental risks, uncertainties about estimates of reserves,
competition, government regulation and political actions, and the ability of Sun
Energy Partners, L.P. to implement its business strategy. All such
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
II-2
<PAGE> 41
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Sun Energy Partners, L.P. (Sun Energy Partners) engages in the oil and gas
exploration and production business in the United States. Prior to February 26,
1999, Oryx Energy Company (Oryx) controlled Sun Energy Partners and was its
managing general partner. On that date, Kerr-McGee Corporation (Kerr-McGee)
became managing general partner following its merger with Oryx, and Kerr-McGee
now controls Sun Energy Partners. The Company refers to Oryx prior to February
26, 1999 and to Kerr-McGee since February 26, 1999. As of December 31, 1998, the
Company owned 98.2 percent of Sun Energy Partners. The remaining 1.8 percent
interest is comprised of limited partnership interests held by public
unitholders in the form of depositary units (Units). Eighty-five percent of the
Company's Board of Directors must approve any additional issuance, sale or
transfer of units that would reduce the Company's holdings below 85 percent of
the outstanding units.
On March 9, 1999, Kerr-McGee, as managing general partner, announced that
its Board of Directors had approved a plan to merge Sun Energy Partners with
Kerr-McGee Energy (an indirect wholly-owned subsidiary of Kerr-McGee). As part
of the transaction, each of the publicly held limited partnership units will be
converted solely into the right to receive $4.52 in cash, and as a result,
Kerr-McGee will own 100% of Sun Energy Partners. Detailed information regarding
this transaction will be distributed to all holders of limited partnership units
prior to the consummation of the transaction. The transaction is subject to the
expiration of the Hart-Scott-Rodino waiting period and other customary closing
conditions and regulatory approvals, and is expected to be completed by the end
of the third quarter, 1999.
Sun Energy Partners' business is conducted through Sun Operating Limited
Partnership, a Delaware limited partnership, and several other operating
partnerships (collectively, the Operating Partnerships). In all of the
partnerships which comprise the Operating Partnerships, Sun Energy Partners
holds a 99 percent interest as the sole limited partner, while the Company holds
a 1 percent interest as the managing general partner.
Sun Energy Partners and the Operating Partnerships (collectively, the
Partnership), are managed by the Company. The holders of limited partnership
units have no power to direct or participate in the control of the Partnership.
The Company makes all decisions regarding exploration, development, production
and marketing for properties belonging to the Partnership, all decisions
regarding the sale of less than substantially all of such properties or the
acquisition of properties by the Partnership and all other decisions regarding
the Partnership's business and operations.
The Partnership has no officers or employees. Officers and employees of the
Company perform all management functions required for Sun Energy Partners.
The Partnership's strategy is to target as future growth opportunities
those areas where its advanced technological capabilities will have the greatest
economic impact.
PROVED RESERVES
As of December 31, 1998, the Partnership's proved reserves were an
estimated 209 mmb of liquids and an estimated 1,084 bcf of natural gas, an
aggregate of 390 mmeb of reserves. More information on the estimated quantities
of proved oil and gas reserves and information on proved developed oil and gas
reserves, as well as information concerning the standardized measure of
discounted future net cash flows from estimated production of proved oil and gas
reserves (Standardized Measure), are presented in the "Consolidated Financial
Statements Supplementary Financial and Operating Information." The Partnership
files oil and gas reserve estimates with various governmental regulatory
authorities and agencies, the variability of which does not exceed 5 percent.
II-3
<PAGE> 42
The Partnership's production is exclusively in the United States and in
1998, the Partnership produced 42 mmeb. The Partnership seeks production
replacement through a balanced approach that combines exploration, development
and acquisition. In 1998, the Partnership replaced 88 percent of its production
at an FD&A cost of $11.02 per eb.
OFFSHORE
The Partnership has identified the Gulf of Mexico as the primary focus of
its growth strategy.
The Partnership has a significant presence in the Gulf of Mexico with an
interest in 210 blocks at December 31, 1998, in various stages of exploration,
development and production. The Partnership has an interest in 37 producing
platforms, 19 of which it operates. The Partnership also holds interests in
various offshore pipelines and facilities. In 1997, the Partnership achieved a 6
percent reduction in its offshore operating costs per equivalent barrel. In
1998, operating costs per equivalent barrel increased 12 percent compared to
1997.
Exploration
Of the Gulf of Mexico blocks in which the Partnership owns an interest, 167
are undeveloped. In 1998, the Partnership spent $62 million to acquire interests
in 25 blocks.
In May 1997, the Partnership participated in an exploration discovery,
Garden Banks 215 #4 (Sun Energy Partners 25 percent), the Conger prospect, in
the flex trend. The well encountered approximately 300 feet of net pay thickness
both above and below salt formations. The Garden Banks 215 #4 well was drilled
to a total depth of 21,692 feet subsurface in about 1,500 feet of water depth.
It is adjacent to the Garden Banks 260 Unit (Baldpate), which includes Blocks
215 South, 216, 259 and 260.
In early 1998, the Partnership participated in a successful Conger
appraisal well, Garden Banks 215 #5, which encountered about 300 feet of net pay
sands approximately one and a half miles from the discovery well. Development
will be by a sub-sea tie-back to a host facility on a neighboring block.
Development drilling is scheduled to begin in the second quarter of 1999. First
production from the Conger Field is scheduled for the fourth quarter of the year
2000.
In late 1997, the Partnership participated in a subsalt discovery at its
Penn State Deep prospect. The discovery is located at Garden Banks 216 block
(Sun Energy Partners 50 percent). The Penn State Deep discovery well (GB 216 #3)
encountered hydrocarbons at about 20,500 feet subsurface in 1,450 feet of water
depth. It lies below the GB 216 #2 discovery (Penn State Shallow) drilled in
1996, which encountered 214 net feet of pay in a shallower structure. The GB 216
#3 well found 123 net feet of subsalt pay. The Partnership is developing the
Penn State Shallow discovery as a sub-sea tie-back to the Baldpate facilities
and is evaluating the deeper discovery as another potential tie-back. The Penn
State wells are located approximately three miles to the northeast of the
Baldpate facility.
In late 1997, the Partnership participated in a discovery at High Island
A-553 (Sun Energy Partners 33 percent) on the continental shelf. The A-7 well
tested at a flow rate of 16 mmcf/d and 800 b/d. The HI A-553 A-7 well was
drilled to a total depth of about 13,000 feet in 260 feet of water depth. The
well encountered approximately 100 feet of net pay in 4 zones.
As of December 31, 1998, the Partnership was not drilling or participating
in the drilling of any offshore exploratory wells.
Production and Development
The Partnership owns a 99 percent interest in the four-block High Island
384 Unit which is located approximately 112 miles off the Texas coast in water
depths averaging 360 feet. This development (Patton) was originally discovered
in October 1993, began production in January 1995 and in September 1995 achieved
the expected peak production of 20 meb/d.
II-4
<PAGE> 43
Late in 1995, the Partnership confirmed the presence of natural gas
reserves in a previously untested area of the High Island 384 Unit. The High
Island 385 #3 well encountered 158 feet of net gas pay. Two subsequent
delineation wells found the same pay interval in nearby fault blocks. In the
second phase of Patton, the Partnership installed the "D" platform in 360 feet
of water and developed the new gas reservoir. First production occurred in the
fourth quarter of 1996 with gross production of 35 mmcf/d. In addition, two
wells were drilled and the "E" platform was installed to develop a previously
discovered reservoir on High Island 379. These wells came on stream during the
fourth quarter of 1996 at 24 mmcfe/d.
In 1995, the Partnership approved a plan for the development of Viosca
Knoll 826 (Sun Energy Partners 50 percent and operator) which lies 80 miles off
the Alabama coast in water depths of 1,500 to 2,500 feet. The Neptune
development utilizes a new type of floating production facility called a spar.
The spar is a cylindrical-shaped vessel anchored vertically to the sea floor.
First production occurred in March 1997 and in late 1997 expected peak
production of 30 meb/d was achieved. The second phase of drilling was commenced
in 1998 and a second, higher peak of about 35 meb/d is expected.
The Partnership began production at its Baldpate platform in the Gulf of
Mexico flex trend in September 1998. Production is expected to increase to a
peak of 75meb/d. The nearby Penn State Shallow reservoir is currently being
developed as a sub-sea tie-back to Baldpate. The Company also has a discovery at
Penn State Deep in the same area. The Baldpate facilities have a rated daily
throughput capacity of 60,000 barrels of oil and 200 million cubic feet of gas.
Production levels from Baldpate are expected to increase as a total of 7
pre-drilled wells are brought on line. Development of the Baldpate facility
utilized leading-edge technology by employing an articulated compliant tower
design. At a height of 1,902 feet to the top of the flare boom, it sets a record
as the world's tallest free-standing structure. The Partnership has a 50 percent
working interest in the project.
To facilitate the orderly execution of its deep water strategy, in early
1998, the Partnership secured drilling commitments for a substantial portion of
its deep water drilling plans. The Partnership along with two partners, has
entered into a five-year contract for a deep water semi-submersible drilling
rig, capable of drilling in water depths of up to 6,000 feet. The term of the
contract is five years, plus options to extend, with rig delivery currently
scheduled for the second quarter of 1999. The Partnership has rights to
one-third of the term. The Partnership has entered into a five-year contract for
50-percent of the use of a drill ship. The newly-built vessel will have the
capacity to drill in water depths of up to 7,500 feet and will become available
in the fourth quarter of 1999.
As of December 31, 1998, the Partnership was drilling or participating in
the drilling of 6 gross (2 net) offshore development wells.
ONSHORE
The onshore area has been a major contributor of production volumes and
cash flow with relatively modest reinvestment needs. This is important for the
funding of the Partnership's plans in other strategic areas. In 1995, the
Partnership initiated significant cost-reduction measures at its operated
fields. The Partnership achieved a 4 percent reduction in onshore operating
costs per equivalent barrel in 1997. In 1998, onshore operating costs per
equivalent barrel increased 14 percent compared to 1997 costs. The Partnership
has interests in 60 major onshore fields in five states and operates about 75
percent of its production. In addition, the Partnership has increased its
drilling activity to more rapidly exploit its onshore asset portfolio.
The Partnership is applying 3-D technology to create opportunities in new
fault blocks and deeper pool horizons which provide new volumes and reserves.
The Partnership will continue to exploit its waterflood operations. The onshore
will be managed for maximum cash flow generation.
II-5
<PAGE> 44
Exploration
In 1997, the Partnership drilled 2 exploration wells (Sun Energy Partners
99 percent and operator) at the Seabreeze field in southeast Texas that tested a
total of 33 mmcf/d and 1,160 b/d. The wells were drilled into new fault blocks
as a result of a continuing 3-D seismic program around the Partnership's larger
onshore fields.
At December 31, 1998, the Partnership was not drilling or participating in
the drilling of any onshore exploratory wells.
Production and Development
In 1997, the Partnership increased production at the Northwest Chitwood
Unit, (Sun Energy Partners 69 percent and operator) located in south-central
Oklahoma, through an ongoing reservoir waterflood program. In 1997, daily oil
production increased from about 1,700 barrels to 5,400. In 1998, the NW Chitwood
18-2 and 26-2 wells tested at 2,838 and 840 barrels per day.
As of December 31, 1998, the Partnership was drilling or participating in
the drilling of 5 gross (3 net) development wells onshore.
TABULAR INFORMATION
The following table sets forth the Partnership's undeveloped and developed
oil and gas acreage (in thousands) held at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
GROSS NET
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Undeveloped Acreage
Onshore................................................. 904 908 499 503
Offshore................................................ 927 889 512 521
----- ----- ----- -----
Total................................................ 1,831 1,797 1,011 1,024
===== ===== ===== =====
Developed Acreage
Onshore................................................. 948 982 539 552
Offshore................................................ 225 248 106 116
----- ----- ----- -----
Total................................................ 1,173 1,230 645 668
===== ===== ===== =====
</TABLE>
II-6
<PAGE> 45
The following table sets forth the Partnership's net exploratory and
development oil and gas wells drilled in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
EXPLORATORY WELLS DEVELOPMENT WELLS
------------------ ------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Oil
Onshore........................................... -- -- -- 11 29 43
Offshore.......................................... 2 1 -- 4 4 9
--- --- --- --- --- ---
2 1 -- 15 33 52
--- --- --- --- --- ---
Gas
Onshore........................................... -- 3 -- 23 39 50
Offshore.......................................... -- -- 1 2 4 8
--- --- --- --- --- ---
-- 3 1 25 43 58
--- --- --- --- --- ---
Dry
Onshore........................................... 2 -- -- 7 4 10
Offshore.......................................... 2 3 2 -- 2 2
--- --- --- --- --- ---
4 3 2 7 6 12
--- --- --- --- --- ---
Total.......................................... 6 7 3 47 82 122
=== === === === === ===
</TABLE>
The following table sets forth the Partnership's gross and net producing
oil and gas wells at December 31, 1998:
<TABLE>
<CAPTION>
GROSS* NET
------------- -----------
OIL GAS OIL GAS
----- ----- ----- ---
<S> <C> <C> <C> <C>
Onshore................................................. 2,403 810 1,179 481
Offshore................................................ 86 161 51 87
----- ----- ----- ---
Total.............................................. 2,489 971 1,230 568
===== ===== ===== ===
</TABLE>
- ------------------------------
* Gross producing wells include 104 multiple completion wells (more than one
formation producing into the same well bore).
The following table sets forth the Partnership's average daily net
production for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Crude and Condensate (mb):
Onshore................................................... 24 27 28
Offshore.................................................. 20 19 15
--- --- ---
44 46 43
Processed Natural Gas (mb):................................. 7 7 7
--- --- ---
51 53 50
=== === ===
Natural Gas (mmcf):
Onshore................................................... 211 286 299
Offshore.................................................. 160 199 187
--- --- ---
371 485 486
=== === ===
</TABLE>
II-7
<PAGE> 46
The following table sets forth the Partnership's average revenues and
production costs per unit of oil and gas production for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues:
Crude oil and condensate (per bbl)....................... $13.58 $18.75 $20.43
Natural gas (per mcf).................................... $ 2.10 $ 2.40 $ 2.14
Average production cost per unit of oil and gas
production (per eb):*
Offshore
Operating cost........................................ $ 3.37 $ 3.01 $ 3.20
====== ====== ======
Onshore
Operating cost........................................ $ 3.19 $ 2.81 $ 2.94
Production taxes...................................... 1.05 1.48 1.32
------ ------ ------
Total production costs.............................. $ 4.24 $ 4.29 $ 4.26
====== ====== ======
Total Company operating cost............................. $ 3.28 $ 2.99 $ 3.14
Production taxes...................................... .59 .87 .87
------ ------ ------
Total production costs.............................. $ 3.87 $ 3.86 $ 4.01
====== ====== ======
</TABLE>
- ------------------------------
* Excludes natural gas liquids production.
ASSET DISPOSALS
Assets are managed on a portfolio basis. The Partnership will continue to
buy and sell assets with the intention of upgrading its asset base.
RECOVERY METHODS
During 1998, the Partnership obtained 61 and 39 percent of its crude
production from primary and secondary recovery methods. This compares to 63 and
37 percent of its crude oil production in 1997. At December 31, 1998, the
Partnership was participating in no major tertiary oil recovery programs.
The terms "secondary recovery" and "tertiary recovery" relate to those
methods used to increase the quantity of crude oil and condensate and natural
gas that can be recovered in excess of the quantity recoverable using the
primary energy found in a reservoir. Secondary recovery methods include pressure
maintenance by waterflooding or natural gas injection.
MARKETING OF OIL AND GAS
Distribution
Crude oil, condensate and natural gas are distributed through pipelines
and/or trucks or barges to traders, end users, gatherers and transportation
companies. Sufficient distribution systems exist and are readily available in
the areas of the Partnership's production to enable the Partnership to
effectively market its oil and gas. In some instances, the Partnership owns an
interest in these systems.
Crude Oil and Condensate
During 1998, sales to Sun Company, Inc. and Amoco Production Company
totaled approximately 12 and 16 percent of the Partnership's sales of crude oil
and condensate. No other customer purchased more than 10 percent of the
Partnership's sales of crude oil and condensate.
Since most of the Partnership's crude oil and condensate is produced in
areas where there are other buyers offering to purchase at market prices, the
Partnership believes that the loss of any major purchaser
II-8
<PAGE> 47
would not have a material adverse effect on the Partnership's business. In 1998,
the 10 largest customers accounted for approximately 82 percent of such sales.
Currently, approximately 55 percent of sales are made pursuant to
arrangements that are cancelable upon 30 days' written notice by the Partnership
or the purchaser, with substantially all of the remainder of the production
being sold pursuant to contracts of varying terms of up to six years in length.
Natural Gas
The Partnership sold approximately 50 percent of its natural gas production
in 1998 to Producers Energy Marketing Company, LLC (ProEnergy). ProEnergy has
exclusive marketing rights to gas production owned or controlled by the
Partnership for up to 10 years. The Partnership has the option to terminate the
marketing agreement after six years. ProEnergy purchases the majority of its
members' gas at index prices. No other customer purchased more than 10 percent
of the Partnership's natural gas. Approximately 34 percent of the Partnership's
natural gas was purchased by various local distribution companies, end users and
processors of natural gas under term contracts predating the formation of
ProEnergy. Most of these agreements will come to term within three years.
Hedging
Because of the volatility of oil and gas prices, the Partnership
periodically has entered into crude oil and natural gas hedging activities.
Effective with the Kerr-McGee/Oryx merger, the Partnership has elected to
eliminate the hedging program and all contracts have been closed.
REGULATION
General
The oil and gas industry is subject to regulation by national, state and
local governments relating to such matters as the award of exploration and
production interests, the imposition of specific drilling obligations,
environmental protection controls and control over the development and
abandonment of a field (including restrictions on production and abandonment of
production facilities). The industry is also subject to the payment of royalties
and taxes, which tend to be high compared to those levied on other commercial
activities. The Partnership cannot predict the impact of future regulatory,
taxation and royalty initiatives.
Natural Gas
The domestic gas industry remains under federal regulation pursuant to the
Natural Gas Act and the Natural Gas Policy Act.
Environmental Matters
The Partnership is subject to, and makes every effort to comply with,
various environmental quality control regulations of national and local
governments. Although environmental requirements can have a substantial impact
upon the energy industry, generally these requirements do not appear to affect
the Partnership any differently or to any greater or lesser extent than other
exploration and production companies.
The Partnership has been named as a potentially responsible party (PRP) at
four sites pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended. At two of these sites, the Partnership
has been named as a de minimis party and therefore expects its liability to be
small. At a third site, the Partnership is reviewing its options and anticipates
that it will participate in steering committee activities with the Environmental
Protection Agency (EPA). At the fourth and largest site, the Operating
Industries, Inc. site in California, the Partnership has participated in a
steering committee consisting of 139 companies. The steering committee and other
PRPs previously entered into two partial consent decrees with the EPA providing
for remedial actions which have been or are to be
II-9
<PAGE> 48
completed. The steering committee has recently successfully negotiated a third
partial consent decree which provides for the following remedial actions: a clay
cover, methane capturing wells and leachate destruction facilities. The
remaining work at the site involves groundwater evaluation and long-term
operation and maintenance.
Based on the facts outlined above and the Partnership's ongoing analyses of
the actions where it has been identified as a PRP, the Partnership believes that
it has accrued sufficient reserves to absorb the ultimate cost of such actions
and that such costs will not have a material impact on the Partnership's
financial condition. While liability at superfund sites is typically joint and
several, the Partnership has no reason to believe that defaults by other PRPs
will result in liability of the Partnership materially larger than expected.
COMPETITION
The oil and gas industry is highly competitive. Integrated companies,
independent companies and individual producers and operators are active bidders
for desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. Although these competitors may
have financial resources substantially greater than those of the Partnership,
management of the Company believes that the Partnership is in a position to
compete effectively.
The availability of a ready market for the Partnership's oil and gas
production depends on numerous factors beyond its control, including the level
of prices and consumer demand, the extent of worldwide oil and gas production,
the cost and availability of alternative fuels, the cost and proximity of
pipelines and other transportation facilities, regulation by national and local
authorities and the cost of compliance with applicable environmental
regulations.
TECHNOLOGY
The Partnership's exploration, development and production activities depend
upon the use of applied technology. In support of this in 1998, the Partnership,
through the managing general partner, had 35 engineers, geoscientists,
technicians and support personnel focusing on the technology used in the
exploration for, and development and production of, energy resources. The
Partnership's expenditures on technology activities, including its share of the
managing general partner's employee-related costs, were $11 million, $9 million
and $8 million for the years 1998, 1997 and 1996.
CONFLICTS OF INTEREST
Certain conflicts of interest may arise as a result of the relationships
between the Company and the Partnership. The Company has oil and gas interests
in the Gulf of Mexico in addition to such interests held through the
Partnership. The directors and officers of the Company have fiduciary duties to
manage the Company in the best interest of its stockholders. The Company, as
managing general partner of the Partnership, has a fiduciary duty to manage the
Partnership in a manner that is fair to the public unitholders. The duties of
the directors of the Company to its stockholders may therefore come into
conflict with the duties of the Company as managing general partner of the
Partnership.
A Committee of the Board of Directors of the Company, none of whose members
is affiliated with the Company except as Company directors or stockholders or as
holders of units, reviews policies and procedures regarding matters of potential
conflict of interest. The Committee also monitors the application of such
policies and procedures.
OTHER
The Partnership's financial condition and business operations are affected
from time to time by political developments and laws and regulations which
relate to such matters as production, taxes, property, imports, pricing and
environmental controls. The Company makes no representations as to future events
and developments which could affect the Partnership's operations and financial
condition. Oil and gas
II-10
<PAGE> 49
prices are subject to supply and demand. Political developments (especially in
the Middle East) and the decisions of OPEC can particularly affect world oil
supply and oil prices. Furthermore, the Partnership's business and financial
condition could be affected by, among other things, competition, future price
changes or controls, material and labor costs, legislation, transportation
regulations, tariffs, embargoes and armed conflicts.
ITEM 3. LEGAL PROCEEDINGS
The historical method used by the oil industry in the United States to
establish the price at which crude oil is bought and sold is being challenged.
Buyers and sellers have traditionally determined the market price of crude oil
by reference to "posted prices", which are prices published by certain crude oil
buyers such as crude oil refiners and transporters as the price at which they
are willing to buy. A number of suits have been brought alleging that posted
prices have been set consistently below market value, and that, as a result,
royalties have been underpaid.
The Partnership was named as a defendant in such a case filed in state
court in Starr County, Texas in April, 1995 and a co-defendant in cases filed in
state courts in Lee County, Texas and in Louisiana and Alabama and in federal
courts in Texas, Louisiana and Mississippi. All of these lawsuits seek
certification as class actions on behalf of royalty owners in specific
geographic areas, except the Texas and Alabama cases, which seek certification
of a nationwide class of royalty owners. These cases also allege that the co-
defendants have conspired and acted in concert to establish the price of crude
oil in violation of antitrust statutes. These suits are similar to those brought
in Texas by the Texas General Land Office, and in New Mexico, Oklahoma and
Florida by private royalty owners against major crude oil producers. Suits are
also being brought by natural gas royalty interest owners regarding royalty
valuation and deductions of post-production costs from royalty.
The Partnership holds and has held interests in a number of federal and
Indian oil and gas production leases. The Minerals Management Service (MMS) of
the United States Department of the Interior is challenging the prices on which
royalties were based for oil and gas produced from certain of these leases. The
MMS has claimed that a number of crude oil producers including the Partnership
underpaid royalties owed the federal government on California crude oil
production from 1980 to 1988 and has sent Orders to Pay to a number of producers
including the Partnership. Separately, numerous oil and gas producers, including
the managing general partners of certain of the Operating Partnerships, have
been named as defendants in lawsuits brought pursuant to the federal False
Claims Act in connection with royalty payments on production from federal and
Indian lands.
While a number of claims and suits against the Partnership and other crude
oil and natural gas producers have already been brought by a variety of
governmental and private plaintiffs in a number of jurisdictions, the fact that
these suits challenge practices common to the industry suggests that additional
lawsuits against the Partnership may be filed. The suits filed to date, to
include the actions in which the Partnership is a party, are procedurally in the
preliminary stages, though settlement discussions have taken place with respect
to a number of claims. The Partnership believes it has meritorious defenses and,
if acceptable settlements cannot be reached, intends to defend these claims and
lawsuits vigorously.
The Partnership is involved in a number of other legal and administrative
proceedings arising in the ordinary course of its oil and gas business. Although
the ultimate outcome of these proceedings cannot be ascertained at this time, it
is reasonably possible that some of the proceedings could be resolved
unfavorably to the Partnership. Management of the Company believes that any
liabilities which may arise out of legal claims or proceedings would not be
material in relation to its financial position, results of operations or
liquidity at December 31, 1998. The Company intends to maintain liability and
other insurance for the Partnership of the type customary in the oil and gas
business with such coverage limits as the Company deems prudent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
None.
II-11
<PAGE> 50
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP
UNITS AND RELATED SECURITY HOLDER MATTERS
The depositary units of Sun Energy Partners, L.P. are traded on the New
York Stock Exchange, Inc. The following table sets forth the high and low sales
prices per unit, as reported on the New York Stock Exchange Composite
Transactions quotations, for the periods indicated:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter......................................... $4 3/4 $4 $5 5/8 $4 3/8
Second Quarter........................................ $4 1/2 $3 5/16 $5 3/8 $4 1/4
Third Quarter......................................... $3 15/16 $2 9/16 $6 1/16 $5 1/8
Fourth Quarter........................................ $4 1/16 $2 3/4 $5 5/8 $4 1/4
</TABLE>
The Partnership had approximately 1,445 holders of record of depositary
units as of February 23, 1999.
For the years 1998 and 1997, the quarterly cash distributions per unit paid
to unitholders were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First Quarter............................................... $.02 $.15
Second Quarter.............................................. -- .08
Third Quarter............................................... -- .02
Fourth Quarter.............................................. -- --
---- ----
Total.................................................. $.02 $.25
==== ====
</TABLE>
Any future quarterly cash distributions to unitholders are expected to be
paid on or about the 10th day of March, June, September and December in each
year. Distributions will fluctuate due to oil and gas prices, production
volumes, operating costs and the timing and amount of capital expenditures and
divestment proceeds. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Cash Distribution Policy.")
II-12
<PAGE> 51
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
For the Period
Revenues......................................... $ 523 $ 728 $ 686 $ 552 $ 613
Income (loss) before cumulative effect of
accounting change(1).......................... $ (44) $ 239 $ 248 $ 99 $ 100
Net income (loss)(1)............................. $ (44) $ 239 $ 248 $ 99 $ (477)
Net income (loss) per unit before cumulative
effect of accounting change(1)................ $ (.10) $ .57 $ .59 $ .24 $ .24
Net income (loss) per unit(1).................... $ (.10) $ .57 $ .59 $ .24 $(1.13)
Cash distributions paid to unitholders........... $ 8 $ 105 $ 67 $ 194 $ 114
Cash distributions paid per unit................. $ .02 $ .25 $ .16 $ .46 $ .27
Weighted average units outstanding (in
thousands).................................... 421.2 421.2 421.2 421.2 421.2
Capital expenditures............................. $ 367 $ 410 $ 314 $ 206 $ 166
At End of Period
Total assets..................................... $1,374 $1,468 $1,299 $1,143 $1,181
Long-term debt(2)................................ $ 24 $ 38 $ 52 $ 62 $ 74
Partners' capital................................ $1,102 $1,154 $1,020 $ 839 $ 934
Book value per unit.............................. $ 2.62 $ 2.74 $ 2.42 $ 1.99 $ 2.22
</TABLE>
- ------------------------------
(1) Effective January 1, 1994, the Partnership adopted a new policy for
determining the ceiling test for its oil and gas properties. A one-time
non-cash charge of $577 million for the cumulative effect of the change was
recognized in the earnings for 1994. As a result of an impairment test
related to the application of Statement of Financial Accounting Standards
No. 121, the Partnership reported a non-cash write-down of assets of $75
million in the fourth quarter of 1998.
(2) Includes $24 million, $38 million, $51 million, $62 million and $72 million
of long-term debt due to the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of the Partnership's financial
condition and results of operations which follow should be read in conjunction
with the Consolidated Financial Statements and Selected Financial Data included
in this report.
RESULTS OF OPERATIONS
The Partnership reported a net loss in 1998 of $44 million. The realized
oil price in 1998 decreased 28 percent to $13.58 per barrel and the realized
natural gas price decreased 13 percent to $2.10 per mcf. Exploration costs
increased 57 percent primarily from increased offshore dry hole costs and
increased geological and geophysical expense due to increased activity.
Depreciation, depletion and amortization expense increased 29 percent primarily
due to a non-cash write down of assets (see Note 6 to the Consolidated Financial
Statements).
Net income in 1997 was $239 million. Production volumes increased 2 percent
in 1997 compared to 1996 primarily due to offshore development. The realized oil
price in 1997 decreased 8 percent to $18.75 per barrel. The realized gas price
in 1997 increased 12 percent to $2.40 per mcf. Exploration costs increased 45
percent primarily from increased offshore dry hole costs and increased
geological and geophysical expense due to increased activity. Depreciation,
depletion and amortization expense increased 19 percent primarily because of
additional development and higher production volumes.
Net income in 1996 was $248 million. The realized oil price in 1996
increased 24 percent to $20.43 per barrel. The increase in 1996 followed a 12
percent increase in 1995 compared to 1994. The
II-13
<PAGE> 52
Partnership's realized gas price in 1996 increased 24 percent to $2.14 per mcf.
Total costs and expenses decreased 3 percent to $438 million in 1996. Operating
costs decreased 14 percent in 1996 due to cost efficiency measures. Production
taxes increased 27 percent in 1996 due to higher prices.
LIQUIDITY AND CAPITAL RESOURCES
ED&A outlays were $398 million in 1998, $427 million in 1997 and $317
million in 1996. In 1998, 61 percent of the Partnership's total ED&A investment
was for development and acquisition and 39 percent was for exploration. In 1999,
in the absence of the planned merger of the Partnership, total ED&A outlays
would have been expected to be approximately $220 million of which 77 percent
was targeted for development and 23 percent for exploration. In 1998, the
Partnership replaced 88 percent of its production at an FD&A cost of $11.02 per
eb.
In 1998, cash flow from operating activities decreased $240 million
compared to 1997 primarily due to lower oil and gas prices and lower production
volumes. Cash flow from investing activities used $273 million in 1998 compared
to $421 million in 1997. Proceeds from divestments were $113 million higher in
1998 while capital expenditures were $43 million lower. Cash flow from financing
activities used $21 million in 1998 compared to a use of $117 million in 1997
primarily due to reduced distributions to unitholders in 1998.
In 1997, cash flow from operating activities increased $143 million
compared to 1996 primarily due to favorable increases in cash flow working
capital components. Cash flow from investing activities used $421 million in
1997 compared to $323 million in 1996. Capital expenditures were $96 million
higher in 1997 while proceeds from divestments were $7 million lower. Cash flow
from financing activities used $117 million in 1997 compared to a use of $78
million in 1996. Cash distributions paid to unitholders were $38 million higher
in 1997 than 1996.
In 1996, cash flow from operating activities increased $58 million from
1995 primarily due to higher oil and gas prices and lower costs and expenses
partially offset by lower production volumes. Cash flow from investing
activities used $323 million in 1996 compared to $144 million in 1995. Proceeds
from divestments were $67 million lower in 1996 while capital expenditures
increased by $108 million. Cash flow used for financing activities decreased by
$127 million in 1996 primarily because of the reduced distributions to
unitholders.
The Partnership adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" effective January 1, 1998. Total
comprehensive income and net loss are identical for the year ended December 31,
1998. Additionally, in January 1998, the Partnership adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," resulting
in the restatement of selected operating information in years prior to 1998.
In December 1997, the Partnership adopted SFAS No. 128, "Earnings per
Share" and SFAS No. 129, "Disclosure of Information about Capital Structure,"
resulting in no material change.
The Partnership's investing levels will be governed by its cash flow from
operating activities which will continue to be affected by prevailing oil and
gas prices, cost levels and production volumes. Volatility in oil and gas prices
experienced over the past several years is expected to continue. Any shortfall
in expected cash flow from operating activities may require adjustment of the
business plans. Options include deferral of discretionary ED&A outlays and the
sale of Partnership units. The Partnership's long-term cash generation
capability is ultimately tied to the value of proved reserves.
RESERVE REPLACEMENT
The ability to sustain cash flow is dependent, among other things, on the
level of the Partnership's oil and gas reserves, oil and gas prices and cost
containment. Replacement of proved reserves through extensions and discoveries,
improved recovery, purchases and revisions to prior reserve estimates in 1998
was 100 percent of liquids production and 78 percent of gas production. Reserve
replacement rates of liquids and gas were 185 and 119 percent in 1997 and 122
and 49 percent in 1996.
II-14
<PAGE> 53
HEDGING ARRANGEMENTS
The Partnership from time to time has entered into commodity futures
contracts to manage its crude oil and natural gas price risk and to maintain
specified margins. Effective with the merger of Oryx into Kerr-McGee, the
Partnership has elected to eliminate the hedging program and all contracts have
been closed.
YEAR 2000 READINESS
In 1996, the Company established a formal Year 2000 Program (Program) to
assess and correct Year 2000 problems in both information technology and
non-informational technology systems. The Program is organized into two major
areas: business systems and facilities integrity. Business systems include
replacement and upgrade of computer hardware and software, including major
business applications, such as purchasing, inventory, engineering, financial,
human resources, etc. Facilities integrity encompasses telecommunications, plant
process controls, instrumentation and embedded chip systems as well as an
assessment of third party Year 2000 readiness.
As a result of the merger of Oryx with Kerr-McGee, the Company is
undertaking steps to minimize Year 2000 problems that might adversely impact the
Partnership.
To date, activities associated with business systems have included:
- inventory and assessment
- remediation and testing of legacy systems and hardware
- communication with critical business partners
Future activities will include:
- conversion of data from Oryx's financial, human resources, production,
technical and other systems into Year 2000 compliant systems utilized
by the Partnership
- remediating and testing certain Oryx legacy systems that will be
retained and utilized by the Partnership
- replacement of hardware and operating systems with Kerr-McGee Year
2000 compliant systems
- Year 2000 integration testing of converted and remediated systems to
ensure proper functionality beyond 2000.
These activities are scheduled to be complete near the end of third
quarter, 1999. Costs expended to date by the Partnership are approximately $1.4
million. Total forecasted costs are approximately $3.6 million, but are being
re-evaluated by the Company as a result of the merger. However, management
believes that the costs are not material to the Partnership's results of
operations, financial position or cash flow.
To date, major activities associated with facilities integrity have
included:
- inventory and assessment
- remediation
- testing and verification
Inventory and assessment activities are essentially complete with
remediation and testing and verification scheduled for completion in third
quarter, 1999. Additional activities will be incorporated and include
communication with third party vendors, suppliers and partners, and development
of contingency plans. These activities are expected to be completed in late
third quarter or early fourth quarter, 1999.
II-15
<PAGE> 54
Costs expended to date have been minor for facilities associated with the
Partnership. Forecasted costs to complete these activities are approximately
$300,000, but are being re-evaluated by the Company as a result of the merger.
Management believes that the Program is comprehensive and reduces Year 2000
risks associated with internal systems to a manageable level. Regardless of
management's efforts to assess and verify readiness there can be no assurance
that all entities affecting the Company will be Year 2000 ready. To address
these concerns, contingency plans will be developed. However, failure by a third
party to remediate their Year 2000 issues in a timely manner could have a
material effect to the Partnership's result of operations and cash flows in a
particular quarter or annual period. Failure of a critical operating or safety
component, or failure by a key third party supplier or customer are believed to
be the most reasonably likely worst case scenarios that could impact the
Partnership.
ENVIRONMENTAL
The Partnership's oil and gas operations are subject to stringent
environmental regulations. The Company is dedicated to the preservation of the
environment and has committed significant resources to comply with such
regulations. Although the Partnership has been named as a potentially
responsible party at sites related to past operations, the Company believes the
Partnership is in general compliance with applicable governmental regulations
and that the potential costs to it, in the aggregate, are not material to its
financial condition. However, risks of substantial costs and liabilities are
inherent in the oil and gas business. Should other developments occur, such as
increasingly strict environmental laws, regulations and enforcement policies or
claims for damages resulting from the Partnership's operations, they could
result in additional costs and liabilities in the future. (See Note 12 to the
Consolidated Financial Statements.)
CASH DISTRIBUTION POLICY
The Partnership funds its capital outlays from internally generated funds,
including cash proceeds from asset sales and makes distributions of only that
cash remaining after such outlays.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL
AND OPERATING INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 14
Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996....................... 15
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... 17
Notes to Consolidated Financial Statements................ 18
Supplementary Financial and Operating
Information -- (Unaudited):
Oil and Gas Data.......................................... 30
Quarterly Financial Information........................... 33
Quarterly Operating Information........................... 34
</TABLE>
II-16
<PAGE> 55
SUN ENERGY PARTNERS, L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Sun Energy Partners, L.P. and the Board of Directors of
Oryx Energy Company:
In our opinion, the accompanying consolidated balance sheets of Sun Energy
Partners, L.P. and its Subsidiaries and the related consolidated statements of
income and cash flows present fairly, in all material respects, the consolidated
financial position of Sun Energy Partners, L.P. and its Subsidiaries as of
December 31, 1998 and 1997 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Oryx Energy Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 22, 1999, except for Note 14 as to which
the date is March 9, 1999
II-17
<PAGE> 56
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues
Oil and gas............................................... $ 501 $ 738 $ 700
Other -- net (Notes 3 and 4).............................. 22 (10) (14)
------ ------ ------
523 728 686
------ ------ ------
Costs and Expenses
Operating costs........................................... 126 138 139
Production taxes (Note 5)................................. 26 39 38
Exploration costs......................................... 96 61 42
Depreciation, depletion and amortization.................. 271 210 177
General and administrative expense (Note 3)............... 40 41 41
Interest and debt expense (Note 3)........................ 20 15 17
Interest capitalized...................................... (12) (15) (16)
------ ------ ------
567 489 438
------ ------ ------
Net Income (Loss)........................................... $ (44) $ 239 $ 248
====== ====== ======
Net Income (Loss) Per Unit.................................. $ (.10) $ .57 $ .59
====== ====== ======
Cash Distributions Paid to Unitholders...................... $ 8 $ 105 $ 67
====== ====== ======
Cash Distributions Paid Per Unit............................ $ .02 $ .25 $ .16
====== ====== ======
Weighted Average Units Outstanding (In Millions)............ 421.2 421.2 421.2
====== ====== ======
</TABLE>
(See Accompanying Notes)
II-18
<PAGE> 57
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 6 $ 2
Accounts receivable and other current assets.............. 65 124
------ ------
Total Current Assets........................................ 71 126
Properties, Plants and Equipment (Note 6)................... 1,221 1,254
Investment in Affiliate (Note 1)............................ 82 88
------ ------
Total Assets................................................ $1,374 $1,468
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Advances from affiliate (Note 3).......................... $ 88 $ 49
Accounts payable.......................................... 58 80
Accrued liabilities (Note 7).............................. 50 84
Current portion of long-term debt due affiliate (Note
8)..................................................... 14 13
Current portion of long-term debt (Note 8)................ 1 1
------ ------
Total Current Liabilities................................... 211 227
Long-Term Debt Due Affiliate (Note 8)....................... 24 38
Deferred Credits and Other Liabilities (Note 12)............ 37 49
Commitments and Contingent Liabilities (Note 9)
Partners' Capital (Notes 10 and 11)
Limited partnership interests............................. 338 354
General partnership interests............................. 764 800
------ ------
Partners' Capital........................................... 1,102 1,154
------ ------
Total Liabilities and Partners' Capital..................... $1,374 $1,468
====== ======
</TABLE>
- ------------------------------
The successful efforts method of accounting is followed.
(See Accompanying Notes)
II-19
<PAGE> 58
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Cash and Cash Equivalents From Operating Activities
Net Income (Loss)........................................... $ (44) $ 239 $ 248
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation, depletion and amortization............... 271 210 177
Dry hole costs and leasehold impairment................ 52 27 19
Loss (gain) on sale of assets.......................... (21) 5 2
Other.................................................. (2) 5 15
----- ----- -----
256 486 461
Changes in working capital:
Accounts receivable and other current assets........... 59 12 (40)
Accounts payable, accrued liabilities and advances from
affiliate............................................. (17) 40 (26)
----- ----- -----
Net Cash Flow Provided From Operating Activities............ 298 538 395
----- ----- -----
Cash and Cash Equivalents From Investing Activities
Capital expenditures...................................... (367) (410) (314)
Proceeds from divestments................................. 114 1 8
Other..................................................... (20) (12) (17)
----- ----- -----
Net Cash Flow Used For Investing Activities................. (273) (421) (323)
----- ----- -----
Cash and Cash Equivalents From Financing Activities
Proceeds from borrowings.................................. -- -- 2
Repayments of long-term debt.............................. (13) (12) (13)
Cash distributions paid to unitholders.................... (8) (105) (67)
----- ----- -----
Net Cash Flow Used For Financing Activities................. (21) (117) (78)
----- ----- -----
Changes in Cash and Cash Equivalents........................ 4 -- (6)
Cash and Cash Equivalents at Beginning of Year.............. 2 2 8
----- ----- -----
Cash and Cash Equivalents at End of Year.................... $ 6 $ 2 $ 2
===== ===== =====
</TABLE>
(See Accompanying Notes)
II-20
<PAGE> 59
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Control
Sun Energy Partners, L.P. (Sun Energy Partners) engages in the oil and gas
exploration and production business in the United States. Prior to February 26,
1999, Oryx Energy Company (Oryx) controlled Sun Energy Partners and was its
managing general partner. On that date, Kerr-McGee Corporation (Kerr-McGee)
became managing general partner following its merger with Oryx, and Kerr-McGee
now controls Sun Energy Partners. The Company refers to Oryx prior to February
26, 1999 and to Kerr-McGee since February 26, 1999. As of December 31, 1998, the
Company owned 98.2 percent of Sun Energy Partners. The remaining 1.8 percent
interest is comprised of limited partnership interests held by public
unitholders in the form of depositary units (Units).
Sun Energy Partners operates through Sun Operating Limited Partnership, a
Delaware limited partnership, and several other operating partnerships
(collectively, the Operating Partnerships). In all of the partnerships which
comprise the Operating Partnerships, Sun Energy Partners holds a 99 percent
interest as the sole limited partner, while the Company holds a 1 percent
interest as the managing general partner.
Sun Energy Partners and the Operating Partnerships (collectively, the
Partnership) have no officers or employees. The officers and employees of the
Company perform all management functions.
Basis of Presentation
The Partnership's consolidated financial statements have been prepared
using the proportionate method of consolidation for Sun Energy Partners and its
99 percent interest in the Operating Partnerships. Such financial statements are
prepared in accordance with generally accepted accounting principles which is
different from the basis used for reporting taxable income or loss to
unitholders.
Cash Equivalents
The Partnership considers highly liquid investments with original
maturities of less than 3 months to be cash equivalents. Cash equivalents are
stated at cost which approximates market value.
Properties, Plants and Equipment
The successful efforts method of accounting is followed for costs incurred
in oil and gas operations.
Capitalization Policy. Acquisition costs are capitalized when
incurred. Costs of unproved properties are transferred to proved properties
when proved reserves are added. Exploration costs, including geological and
geophysical costs and costs of carrying unproved properties, are charged
against income as incurred. Exploratory drilling costs are capitalized
initially; however, if it is determined that an exploratory well did not
find proved reserves, such capitalized costs are charged to expense, as dry
hole costs, at that time. Development costs are capitalized. Costs incurred
to operate and maintain wells and equipment are expensed.
Leasehold Impairment and Depreciation, Depletion and
Amortization. Periodic valuation provisions for impairment of capitalized
costs of unproved properties are expensed. The acquisition costs of proved
properties are depleted by the unit-of-production method based on proved
reserves by field. Capitalized exploratory drilling costs which result in
the addition of proved reserves and development costs are amortized by the
unit-of-production method based on proved developed reserves by field. In
addition, unamortized capital costs at a field level are reduced to fair
value if the sum of expected undiscounted future cash flows is less than
net book value.
II-21
<PAGE> 60
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dismantlement, Restoration and Abandonment Costs. Such costs are
estimated and accrued as a component of depreciation, depletion and
amortization expense; actual costs are charged to the accrual.
Retirements. Gains and losses on the disposals of fixed assets are
generally reflected in income. For certain property groups, the cost less
salvage value of property sold or abandoned is charged to accumulated
depreciation, depletion and amortization except that gains and losses for
these groups are taken into income for unusual retirements or retirements
involving an entire property group.
Investment in Affiliate
Effective in 1988, Oryx Energy Company issued three million shares of its
$1 par value common stock to an operating partnership of the Partnership in
exchange for certain assets. These shares were converted into 1,107,000 shares
of Kerr-McGee common stock consistent with the terms of the Kerr-McGee/Oryx
merger agreement (Note 14) and continue to be non-voting and legally restricted
from disposition. The Partnership accounts for this investment under the cost
method, whereby investment income is recognized by the Partnership if and when
common dividends are received from the Company.
Capitalized Interest
The Partnership capitalizes interest costs incurred as a result of the
acquisition and installation of significant assets.
Income Taxes
The Operating Partnerships and Sun Energy Partners are treated as
partnerships for income tax purposes and, as a result, income or loss of the
Partnership is includable in the tax returns of the individual unitholders.
Accordingly, no recognition has been given to income taxes in the financial
statements.
At December 31, 1998, 1997 and 1996, the Partnership's financial reporting
bases of assets and liabilities exceeded the tax bases of its assets and
liabilities (net temporary differences) by $654 million, $758 million and $596
million.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes
cash, highly liquid investments with remaining maturities of less than 3 months
(see "Cash Equivalents", above) and advances to affiliate.
Interest paid totaled $20 million, $15 million and $17 million in 1998,
1997 and 1996.
Sales of Oil and Gas
Sales of oil and gas are recorded on the entitlement method. Differences
between actual production and entitlements result in a receivable when
underproduction occurs and a payable when overproduction occurs.
During 1998, 1997 and 1996, sales of oil to the Partnership's top purchaser
totaled approximately 16 percent, 18 percent and 8 percent, and sales of natural
gas to the Partnership's top purchaser totaled 50 percent, 52 percent and 51
percent. The Partnership believes that the loss of any major purchaser would not
have a material adverse effect on its business.
II-22
<PAGE> 61
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and Gas Price Hedging Activity
The Partnership, from time to time, enters into arrangements to hedge the
impact of price fluctuations on anticipated crude oil and natural gas sales.
Gains or losses on hedging activities are recognized in oil and gas revenues in
the period in which the hedged production is sold (Note 2).
Environmental Costs
The Partnership establishes reserves for environmental liabilities as
incurred (Note 12).
Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Partnership adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" effective January 1, 1998. Total
comprehensive income and net loss are identical for the year ended December 31,
1998. Additionally, in January 1998, the Partnership adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," resulting
in the restatement of selected operating information in years prior to 1998. In
December 1997, the Partnership adopted SFAS No. 128, "Earnings per Share" and
SFAS No. 129, "Disclosure of Information about Capital Structure," resulting in
no material change.
2) FINANCIAL INSTRUMENTS
Derivatives
As discussed in Note 1, the Partnership enters into hedging arrangements
for crude oil and natural gas prices with major financial institutions. The
Partnership does not enter into derivative transactions for trading purposes.
At December 31, 1998, the Partnership was a party to crude oil collar
contracts to hedge about 7 percent of its estimated 1999 crude oil production at
an average floor price of $15.85 per barrel and an average ceiling price of
$17.35 per barrel. Approximately 31 percent of its estimated 1999 natural gas
production was hedged at an average floor price of $2.29 per mmbtu and an
average ceiling price of $2.47 per mmbtu. At December 31, 1997, the Partnership
was a party to crude oil and natural gas contracts to hedge about 9 percent of
its estimated 1998 crude oil production at an average floor price of $20.17 per
barrel and an average ceiling price of $21.24 per barrel and 20 percent of its
estimated 1998 natural gas production at an average floor price of $2.19 per
mmbtu and an average ceiling price of $2.40 per mmbtu. These arrangements serve
to reduce the volatility associated with prices of crude oil and natural gas.
The aggregate carrying values of these assets at December 31, 1998 and 1997 were
$7 million and $2 million and the aggregate fair values, subject to daily
fluctuation, based on quotes from brokers, were approximately $18 million and $5
million.
The above mentioned derivative contracts expose the Partnership to credit
risk. The Partnership has established controls to manage this risk and closely
monitors the creditworthiness of its counterparties which are major financial
institutions. In the normal course of business, collateral is not required for
financial instruments with credit risk. The Partnership believes that losses
from nonperformance are unlikely to occur.
II-23
<PAGE> 62
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2) FINANCIAL INSTRUMENTS (CONTINUED)
Other Financial Instruments
At December 31, 1998 and 1997, the carrying values of the Partnership's
long-term debt, including amounts due within one year, were $39 million and $52
million (Note 8). At December 31, 1998 and 1997, the aggregate fair values of
the Partnership's long-term debt were approximately $41 million and $55 million,
estimated primarily based on current rates offered to the Partnership for debt
of the same remaining maturities.
3) RELATED PARTY TRANSACTIONS
Advances to/from Affiliate
The Company has served as the Partnership's lender and borrower of funds
and a clearing-house for the settlement of intercompany receivables and
payables. Deposits earn interest at a rate equal to the rate paid by a major
money market fund. Demand loans bear interest at a rate based on the prime rate.
Long-Term Debt Due Affiliate
The Partnership is indebted to the Company under a 9.75% note due 1999-2001
(Note 8).
Sales of Natural Gas
During the fourth quarter of 1995, the Partnership, Apache Corporation and
Parker & Parsley Petroleum Company formed Producers Energy Marketing Company,
LLC (ProEnergy) to jointly market natural gas. Full operations commenced in
April 1996. In 1997, Pioneer Natural Resources Company (formerly Parker &
Parsley Petroleum Company) terminated its relationship with ProEnergy. As of
December 31, 1997 the Partnership had an ownership interest of 40 percent in
ProEnergy; however, ownership varied based on the Partnership's share of natural
gas throughput for the preceding quarter. The Partnership accounted for its
investment in ProEnergy using the equity method, and as of December 31, 1997 had
an investment in ProEnergy of $4 million. The Partnership sold substantially all
of its natural gas production to ProEnergy at index prices. On June 18, 1998,
the Partnership sold its interest in ProEnergy at a gain of $15 million and
entered into an agreement with the purchaser whereby the purchaser would market
the Partnership's gas production for up to ten years through ProEnergy. Natural
gas sales to ProEnergy totaled $82 million for the six months ended June 30,
1998, $219 million for the year ended December 31, 1997 and $193 million for the
nine months ended December 31, 1996. At December 31, 1997, the Partnership had
an outstanding receivable balance of $22 million from ProEnergy. On June 30,
1998, the Partnership had an outstanding receivable balance of $19 million from
ProEnergy which was subsequently collected.
Direct and Indirect Cost
The Company is reimbursed by the Partnership for all direct costs incurred
in performing management functions and indirect costs (including payroll and
payroll related costs and the cost of postemployment benefits and management
incentive plans) allocable to the Partnership. The full cost of direct and
indirect costs incurred on behalf of the Partnership by the Company is allocated
to the Partnership based on services rendered and extent of use. Such costs,
which are charged principally to production cost, exploration cost and general
and administrative expense, totaled $57 million, $61 million and $61 million for
the years 1998, 1997 and 1996. The Company does not receive any carried
interests, promotions, back-ins or other similar compensation as the general
partner of the Partnership.
II-24
<PAGE> 63
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3) RELATED PARTY TRANSACTIONS (CONTINUED)
Interest Income
Interest income received from the Company, which is reflected in
"Other-net" in the Consolidated Statements of Income, was earned on advances to
the Company and totaled $3 million, $4 million and $4 million during the years
1998, 1997 and 1996.
Interest Cost
Interest cost paid to the Company, which is included in "Interest and debt
expense" in the Consolidated Statements of Income, was primarily incurred on
long-term debt and advances due the Company and totaled $20 million, $14 million
and $16 million during the years 1998, 1997 and 1996 (Note 8).
4) OTHER-NET
Other-net consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Interest income............................................. $ 3 $ 4 $ 4
Gain (loss) on sale of assets............................... 21 (5) (2)
Miscellaneous............................................... (2) (9) (16)
--- ---- ----
$22 $(10) $(14)
=== ==== ====
</TABLE>
5) PRODUCTION TAXES
Production taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Severance................................................... $15 $28 $29
Property taxes.............................................. 11 11 9
--- --- ---
$26 $39 $38
=== === ===
</TABLE>
II-25
<PAGE> 64
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) PROPERTIES, PLANTS AND EQUIPMENT
At December 31, the Partnership's properties, plants and equipment and
accumulated depreciation, depletion and amortization were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Gross Investment
Proved properties......................................... $3,716 $3,840
Unproved properties....................................... 126 75
Other..................................................... 11 8
------ ------
3,853 3,923
------ ------
Less Accumulated Depreciation, Depletion and Amortization
Proved properties*........................................ 2,628 2,666
Other..................................................... 4 3
------ ------
2,632 2,669
------ ------
Net Investment.............................................. $1,221 $1,254
====== ======
</TABLE>
- ------------------------------
* Includes $28 million for dismantlement, restoration and abandonment at
December 31, 1998 and 1997.
As a result of an impairment test related to the application of SFAS No.
121, the Partnership reported a non-cash write-down of assets of $75 million in
1998. The Partnership deemed that certain of its oil and gas fields, primarily
offshore, were impaired because the assets were no longer expected to recover
their net book value through future estimated cash flows. The lower estimated
cash flows result primarily from continued weakness in oil and gas prices. In
addition, minor downward reserve revisions were deemed necessary for certain oil
and gas fields. The prices used in performing the impairment analysis of future
cash flows are the Partnership's investment guideline prices, developed
internally giving consideration to currently available price forecasts for 1999
of $13.00 to $17.50 per barrel and $1.80 to $2.40 per mmbtu as published by
various energy industry consultants and investment banks. The Partnership used
crude oil prices of $14.50 per barrel in 1999 escalating to $18.50 per barrel in
2001 and increased by $.50 per barrel annually thereafter and natural gas prices
of $2.10 per mmbtu in 1999 escalating to $2.20 per mmbtu in 2000 and increased
by $.05 per mmbtu annually thereafter. A discount rate of 10% based on the
Partnership's approximate weighted-average cost of capital was used. The
Partnership used proven reserves and probable reserves when justified by actual
drilling results and planned additional drilling. The impairment loss is
included in "Depreciation, depletion and amortization" in the Consolidated
Statements of Income. The impairment represents about 6% of the Partnership's
oil and gas assets.
7) ACCRUED LIABILITIES
At December 31, the Partnership's accrued liabilities were comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Drilling and operating costs................................ $46 $62
Taxes payable............................................... 4 13
Other....................................................... -- 9
--- ---
$50 $84
=== ===
</TABLE>
II-26
<PAGE> 65
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8) LONG-TERM DEBT
At December 31, the Partnership's long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
9.75% note payable to affiliate, due 1999-2001, payable in
quarterly installments.................................... $38 $51
Capitalized lease obligations due 1999...................... 1 1
--- ---
39 52
Less: Current portion of note payable to affiliate.......... 14 13
Current portion of capitalized lease obligations...... 1 1
--- ---
$24 $38
=== ===
</TABLE>
Repayment obligations under the Partnership's long-term debt due affiliate
are $14 million, $16 million, and $8 million in 1999, 2000 and 2001.
9) COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership has operating leases for office space and other property
and equipment. Total rental expense for such leases for the years 1998, 1997 and
1996 was $13 million, $12 million and $15 million. Under contracts existing as
of December 31, 1998, future minimum annual rentals applicable to noncancellable
operating leases that have initial or remaining lease terms in excess of 1 year
were as follows (in millions of dollars):
<TABLE>
<S> <C>
Year Ending December 31:
1999...................................................... $ 3
2000...................................................... 2
2001...................................................... 2
2002...................................................... 1
---
Total minimum payments required........................ $ 8
===
</TABLE>
Several legal and administrative proceedings are pending against the
Partnership. Although the ultimate outcome of these proceedings cannot be
ascertained at this time, and it is reasonably possible that some of them could
be resolved unfavorably to the Partnership, management of the Company believes
that any liabilities which may arise would not be material to the Partnership's
financial position, results of operations or liquidity.
II-27
<PAGE> 66
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10) PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL PARTNER
------------------------------------------------------- -----------------
ORYX ENERGY ORYX ENERGY
PUBLIC COMPANY TOTAL COMPANY TOTAL
--------------- ----------------- ----------------- ----------------- -----------------
UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS
----- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, UNITS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995............... 7,543 $14 121,628 $243 129,171 $257 292,000 $582 421,171 $ 839
Cash distributions............ -- (1) -- (20) -- (21) -- (46) -- (67)
Net income.................... -- 5 -- 72 -- 77 -- 171 -- 248
----- --- ------- ---- ------- ---- ------- ---- ------- ------
December 31, 1996............... 7,543 18 121,628 295 129,171 313 292,000 707 421,171 1,020
Cash distributions............ -- (2) -- (30) -- (32) -- (73) -- (105)
Net income.................... -- 4 -- 69 -- 73 -- 166 -- 239
----- --- ------- ---- ------- ---- ------- ---- ------- ------
December 31, 1997............... 7,543 20 121,628 334 129,171 354 292,000 800 421,171 1,154
Cash distributions............ -- -- -- (2) -- (2) -- (6) -- (8)
Net loss...................... -- (1) -- (13) -- (14) -- (30) -- (44)
----- --- ------- ---- ------- ---- ------- ---- ------- ------
December 31, 1998............... 7,543 $19 121,628 $319 129,171 $338 292,000 $764 421,171 $1,102
===== === ======= ==== ======= ==== ======= ==== ======= ======
</TABLE>
11) CASH DISTRIBUTIONS
Distributable cash is defined as revenues (including interest income) less
operating costs; seismic, geological and geophysical costs (including related
costs); payments of principal of and interest on debt; general and
administrative expenses including reimbursements to the Company as managing
general partner; capital expenditures (net of proceeds from divestments); and
cash exploration costs. No deduction is made for depreciation, depletion and
amortization.
Sun Energy Partners' quarterly cash distributions per unit for the years
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
First Quarter............................................... $.02 $.15 $.02
Second Quarter.............................................. -- .08 .07
Third Quarter............................................... -- .02 .06
Fourth Quarter.............................................. -- -- .01
---- ---- ----
Total.................................................. $.02 $.25 $.16
==== ==== ====
</TABLE>
12) DEFERRED CREDITS AND OTHER LIABILITIES
At December 31, the Partnership's deferred credits and other liabilities
were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Accrued environmental cleanup costs......................... $14 $15
Other....................................................... 23 34
--- ---
$37 $49
=== ===
</TABLE>
Environmental cleanup costs have been accrued in response to the
identification of several sites that require cleanup based on environmental
pollution, some of which have been designated as superfund sites by the
Environmental Protection Agency (EPA). The Partnership has been named as a
Potentially
II-28
<PAGE> 67
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) DEFERRED CREDITS AND OTHER LIABILITIES (CONTINUED)
Responsible Party (PRP) at four sites pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended. At
two of these sites, the Partnership has been named as a de minimis party and
therefore expects its liability to be small. At a third site, the Partnership is
reviewing its options and anticipates that it will participate in steering
committee activities with the EPA. At the fourth and largest site, the Operating
Industries, Inc. site in California, the Partnership has participated in a
steering committee consisting of 139 companies. The steering committee and other
PRPs previously entered into two partial consent decrees with the EPA providing
for remedial actions which have been or are to be completed. The steering
committee has successfully negotiated a third partial consent decree which
provides for the following remedial actions: a clay cover, methane capturing
wells and leachate destruction facilities. The remaining work at the site
involves groundwater evaluation and long-term operation and maintenance. The
Partnership is a member of the group that is responsible for carrying out the
first phase of the work, which is expected to take 5 to 8 years. Completion of
all phases is estimated to take up to 30 years. The maximum liability of the
group, which is joint and several for each member of the group, is expected to
range from approximately $450 million to $600 million, of which the
Partnership's share is expected to be approximately $10 million. Cleanup costs
are payable over the period that the work is completed.
Based on the facts outlined above and the Partnership's ongoing analyses of
the actions where it has been identified as a PRP, the Partnership believes that
it has accrued sufficient reserves to absorb the ultimate cost of such actions
and that such costs therefore will not have a material impact on the
Partnership's liquidity, capital resources or financial condition. While
liability at superfund sites is typically joint and several, the Partnership has
no reason to believe that defaults by other PRPs will result in liability of the
Partnership materially larger than expected.
In October 1996, Statement of Position (SOP) 96-1, "Environmental
Remediation Liabilities," was issued. It required companies to recognize the
costs of environmental remediation on an accrual basis. The Partnership has and
continues to recognize the costs required by the SOP, therefore, adoption in
1997 had no material impact on its financial position or results of operations.
13) GEOGRAPHIC SEGMENT INFORMATION
Sales of oil to the Partnership's top purchaser in 1998, 1997 and 1996
totaled approximately 16, 18 and 8 percent of oil revenue. Sales of gas to the
Partnership's top purchaser in 1998, 1997 and 1996 totaled approximately 50, 52
and 51 percent of gas revenue. The Partnership believes that the loss of any
major purchaser would not have a material adverse effect on the Partnership's
business.
II-29
<PAGE> 68
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13) GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Financial information by segment, as utilized by management of the Company
for making operating decisions, for the years ended December 31, 1998, 1997 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
ONSHORE OFFSHORE TOTAL
------- -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
December 31, 1998
Revenues
Oil and gas......................................... $283 $ 218 $ 501
Gain on sale of assets.............................. 21 -- 21
Other............................................... (2) -- (2)
---- ----- ------
Total Revenues......................................... 302 218 520
---- ----- ------
Operating Expenses
Operating costs..................................... 69 57 126
Production taxes.................................... 26 -- 26
Exploration costs................................... 26 70 96
Depreciation, depletion and amortization............ 78 193 271
---- ----- ------
Total Operating Expenses............................... 199 320 519
---- ----- ------
Operating Profit (Loss)................................ $103 $(102) 1
==== =====
General and administrative expense.................. (40)
Interest, net....................................... (5)
------
Net Loss............................................... $ (44)
======
Capital Expenditures................................... $ 70 $ 297* $ 367
==== ===== ======
Total Assets........................................... $654 $ 720 $1,374
==== ===== ======
</TABLE>
- ------------------------------
* Includes capitalized interest of $12 million.
II-30
<PAGE> 69
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13) GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
ONSHORE OFFSHORE TOTAL
------- -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
December 31, 1997
Revenues
Oil and gas......................................... $440 $ 298 $ 738
Loss on sale of assets.............................. (5) -- (5)
Other............................................... (9) -- (9)
---- ----- ------
Total Revenues......................................... 426 298 724
---- ----- ------
Operating Expenses
Operating costs..................................... 79 59 138
Production taxes.................................... 39 -- 39
Exploration costs................................... 13 48 61
Depreciation, depletion and amortization............ 90 120 210
---- ----- ------
Total Operating Expenses............................... 221 227 448
---- ----- ------
Operating Profit....................................... $205 $ 71 276
==== =====
General and administrative expense.................. (41)
Interest, net....................................... 4
------
Net Income............................................. $ 239
======
Capital Expenditures................................... $126 $ 284* $ 410
==== ===== ======
Total Assets........................................... $788 $ 680 $1,468
==== ===== ======
</TABLE>
- ------------------------------
* Includes capitalized interest of $15 million.
II-31
<PAGE> 70
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13) GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
ONSHORE OFFSHORE TOTAL
------- -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
December 31, 1996
Revenues
Oil and gas......................................... $440 $ 260 $ 700
Loss on sale of assets.............................. (2) -- (2)
Other............................................... (16) -- (16)
---- ----- ------
Total Revenues......................................... 422 260 682
---- ----- ------
Operating Expenses
Operating costs..................................... 82 57 139
Production taxes.................................... 38 -- 38
Exploration costs................................... 9 33 42
Depreciation, depletion and amortization............ 99 78 177
---- ----- ------
Total Operating Expenses............................... 228 168 396
---- ----- ------
Operating Profit....................................... $194 $ 92 286
==== =====
General and administrative expense.................. (41)
Interest, net....................................... 3
------
Net Income............................................. $ 248
======
Capital Expenditures................................... $ 86 $ 228* $ 314
==== ===== ======
Total Assets........................................... $792 $ 507 $1,299
==== ===== ======
</TABLE>
- ------------------------------
* Includes capitalized interest of $16 million.
14) SUBSEQUENT EVENTS
Effective February 26, 1999, Oryx merged into Kerr-McGee.
On March 9, 1999, Kerr-McGee, as managing general partner, announced that
its Board of Directors had approved a plan to merge Sun Energy Partners with
Kerr-McGee Energy (an indirect wholly-owned subsidiary of Kerr-McGee). As part
of the transaction, each of the publicly held limited partnership units will be
converted solely into the right to receive $4.52 in cash, and as a result,
Kerr-McGee will own 100% of Sun Energy Partners. The transaction is subject to
the expiration of the Hart-Scott-Rodino waiting period and other customary
closing conditions and regulatory approvals, and is expected to be completed by
the end of the third quarter, 1999.
II-32
<PAGE> 71
SUN ENERGY PARTNERS, L.P.
SUPPLEMENTARY FINANCIAL
AND OPERATING INFORMATION (UNAUDITED)
OIL AND GAS DATA
CAPITALIZED COSTS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Onshore:
Proved properties......................................... $1,881 $2,218
Unproved properties....................................... 2 4
------ ------
Total capitalized costs................................... 1,883 2,222
Less accumulated depreciation, depletion and
amortization........................................... 1,450 1,680
------ ------
Net capitalized costs..................................... $ 433 $ 542
====== ======
Offshore:
Proved properties......................................... $1,835 $1,622
Unproved properties....................................... 124 71
------ ------
Total capitalized costs................................... 1,959 1,693
Less accumulated depreciation, depletion and
amortization........................................... 1,178 986
------ ------
Net capitalized costs..................................... $ 781 $ 707
====== ======
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Onshore:
Property acquisition costs:
Proved................................................. $ -- $ 9 $ 6
Unproved............................................... -- 2 --
Exploration costs......................................... 23 13 12
Development costs......................................... 68 111 76
---- ---- ----
$ 91 $135 $ 94
==== ==== ====
Offshore:
Property acquisition costs:
Proved................................................. $ 2 $ -- $ --
Unproved............................................... 62 30 24
Exploration costs......................................... 70 77 33
Development costs*........................................ 173 185 166
---- ---- ----
$307 $292 $223
==== ==== ====
</TABLE>
- ---------------
* Excludes capitalized interest of $12 million, $15 million and $16 million for
1998, 1997 and 1996.
II-33
<PAGE> 72
EXPLORATION COSTS
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Onshore
Dry hole costs............................................ $ 6 $-- $--
Leasehold impairment...................................... 7 4 1
Geological and geophysical................................ 12 10 9
--- --- ---
$25 $14 $10
=== === ===
Offshore
Dry hole costs............................................ $39 $23 $18
Geological and geophysical................................ 29 21 13
Other..................................................... 3 3 1
--- --- ---
$71 $47 $32
=== === ===
</TABLE>
ESTIMATED NET QUANTITIES OF PROVED OIL AND GAS RESERVES
Proved reserve quantities were based on estimates prepared by Company
engineers in accordance with guidelines established by the Securities and
Exchange Commission and were reviewed by Gaffney, Cline & Associates, Inc.,
independent petroleum engineers. The Partnership considers such estimates to be
reasonable; however, due to inherent uncertainties and the limited nature of
reservoir data, estimates of underground reserves are imprecise and subject to
change over time as additional information becomes available.
There has been no favorable or adverse event that has caused a significant
change in estimated proved reserves since December 31, 1998. The Partnership has
no long-term supply agreements or contracts with governments or authorities in
which it acts as producer nor does it have any interest in oil and gas
II-34
<PAGE> 73
operations accounted for by the equity method. All reserves are located onshore
and offshore within the United States.
<TABLE>
<CAPTION>
CRUDE OIL AND CONDENSATE NATURAL GAS LIQUIDS NATURAL GAS*
(MILLIONS OF BARRELS) (MILLIONS OF BARRELS) (BILLIONS OF CUBIC FEET)
---------------------------- ---------------------------- ----------------------------
ONSHORE OFFSHORE TOTAL ONSHORE OFFSHORE TOTAL ONSHORE OFFSHORE TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
BALANCE AT DECEMBER 31, 1995....... 120 66 186 15 3 18 813 472 1,285
Revisions of previous estimates.... 5 4 9 3 (1) 2 (10) (12) (22)
Improved recovery.................. 1 -- 1 -- -- -- -- -- --
Purchases of minerals in place..... 3 -- 3 -- -- -- 8 -- 8
Sales of minerals in place......... (3) -- (3) -- -- -- (26) (6) (32)
Extensions and discoveries......... 2 3 5 2 -- 2 56 45 101
Production......................... (10) (6) (16) (2) -- (2) (110) (68) (178)
--- -- --- -- -- -- ---- --- -----
BALANCE AT DECEMBER 31, 1996....... 118 67 185 18 2 20 731 431 1,162
Revisions of previous estimates.... 2 2 4 2 -- 2 14 (23) (9)
Improved recovery.................. 3 -- 3 1 -- 1 8 3 11
Purchases of minerals in place..... 4 -- 4 1 -- 1 16 3 19
Sales of minerals in place......... -- -- -- -- -- -- (3) -- (3)
Extensions and discoveries......... 1 19 20 1 -- 1 37 153 190
Production......................... (10) (7) (17) (3) -- (3) (106) (71) (177)
--- -- --- -- -- -- ---- --- -----
BALANCE AT DECEMBER 31, 1997....... 118 81 199 20 2 22 697 496 1,193
Revisions of previous estimates.... 1 5 6 1 (1) -- 32 (37) (5)
Improved recovery.................. -- -- -- -- -- -- -- -- --
Purchases of minerals in place..... -- -- -- -- -- -- -- 4 4
Sales of minerals in place......... (12) -- (12) -- -- -- (80) -- (80)
Extensions and discoveries......... -- 12 12 1 -- 1 28 79 107
Production......................... (9) (7) (16) (3) -- (3) (78) (57) (135)
--- -- --- -- -- -- ---- --- -----
BALANCE AT DECEMBER 31, 1998....... 98 91 189 19 1 20 599 485 1,084
=== == === == == == ==== === =====
Proved Developed Reserves At:
December 31, 1995................ 99 16 115 13 -- 13 638 234 872
December 31, 1996................ 101 16 117 14 -- 14 603 205 808
December 31, 1997................ 101 20 121 16 -- 16 575 174 749
December 31, 1998................ 85 21 106 15 -- 15 491 144 635
</TABLE>
- ------------------------------
* Natural gas reserve volumes include liquefiable hydrocarbons approximating 5
percent of total gas reserves which are recoverable downstream. Such
recoverable liquids also have been included in natural gas liquids reserve
volumes.
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows from estimated
production of proved oil and gas reserves is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 69, "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69). In computing this data,
assumptions other than those mandated by SFAS No. 69 could produce substantially
different results. The Partnership cautions against viewing this information as
a forecast of future economic conditions or revenues.
The standardized measure has been prepared assuming year-end selling prices
adjusted for future fixed and determinable contractual price changes, year-end
development and production costs and a 10 percent annual discount rate. No
future income tax expense has been provided for the Partnership since it incurs
no income tax liability. (See Summary of Significant Accounting
Policies -- Income Taxes in Note 1 to the Consolidated Financial Statements.)
The year-end realized prices were $8.86 and $17.16 per barrel of oil and $1.82
and $2.29 per mcf of gas for 1998 and 1997.
II-35
<PAGE> 74
<TABLE>
<CAPTION>
ONSHORE OFFSHORE TOTAL
------- -------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
1998
Future cash inflows.................................... $ 2,112 $1,741 $ 3,853
Future production and development costs................ (951) (787) (1,738)
------- ------ -------
Future net cash flows.................................. 1,161 954 2,115
Discount at 10 percent................................. (484) (353) (837)
------- ------ -------
Standardized measure................................... $ 677 $ 601 $ 1,278
======= ====== =======
1997
Future cash inflows.................................... $ 3,870 $2,663 $ 6,533
Future production and development costs................ (1,508) (999) (2,507)
------- ------ -------
Future net cash flows.................................. 2,362 1,664 4,026
Discount at 10 percent................................. (1,001) (549) (1,550)
------- ------ -------
Standardized measure................................... $ 1,361 $1,115 $ 2,476
======= ====== =======
</TABLE>
SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Balance, beginning of year............................. $ 2,476 $ 4,183 $2,341
Increase (decrease) in discounted future net cash
flows:
Sales of oil and gas production, net of related
costs............................................. (349) (561) (523)
Revisions to estimates of proved reserves:
Prices net of production taxes.................... (1,195) (2,023) 1,724
Development costs................................. (225) (167) (9)
Production costs.................................. 208 (1) (31)
Quantities........................................ 22 25 59
Other............................................. (190) (52) (213)
Extensions, discoveries and improved recovery, less
related costs..................................... 142 353 336
Development costs incurred during the period......... 241 296 242
Purchases of reserves in place....................... 3 26 38
Sales of reserves in place........................... (95) (1) (8)
Accretion of discount................................ 240 398 227
------- ------- ------
Balance, end of year................................... $ 1,278 $ 2,476 $4,183
======= ======= ======
</TABLE>
II-36
<PAGE> 75
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
1998............................................ $146 $138 $116 $ 123
==== ==== ==== =====
1997............................................ $200 $169 $169 $ 190
==== ==== ==== =====
Gross profit:*
1998............................................ $ 3 $ 28 $ 16 $ (65)
==== ==== ==== =====
1997............................................ $ 98 $ 58 $ 69 $ 67
==== ==== ==== =====
Net income (loss):
1998............................................ $ -- $ 28 $ 3 $ (75)
==== ==== ==== =====
1997............................................ $ 83 $ 48 $ 51 $ 57
==== ==== ==== =====
Net income (loss)per unit:
1998............................................ $ -- $.07 $.01 $(.18)
==== ==== ==== =====
1997............................................ $.20 $.11 $.12 $ .14
==== ==== ==== =====
</TABLE>
- ------------------------------
* Gross profit equals oil and gas revenues plus gas plant margins less
production cost, exploration cost and depreciation, depletion and
amortization.
QUARTERLY OPERATING INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
Crude oil and condensate:
Net production (thousand barrels daily):
1998................................. 48 45 41 43 44
1997................................. 41 45 49 49 46
Average price (per barrel):
1998................................. $15.05 $13.47 $13.12 $12.51 $13.58
1997................................. $21.19 $18.20 $17.81 $18.21 $18.75
Natural gas:
Net production (million cubic feet
daily):
1998................................. 378 381 366 361 371
1997................................. 507 500 470 462 485
Average price (per thousand cubic feet):
1998................................. $ 2.16 $ 2.11 $ 2.00 $ 2.11 $ 2.10
1997................................. $ 2.77 $ 2.05 $ 2.22 $ 2.55 $ 2.40
</TABLE>
II-37
<PAGE> 76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no employees. The Company, as the managing general
partner of the Partnership, has the responsibility for the Partnership's conduct
of operations. Set forth below is information as of March 1, 1999 concerning the
14 directors of the Company and the 13 executive officers of the Company (3 of
which are also directors). All elected executive officers of the Company are
elected annually by the Board of Directors of the Company. The directors are
divided into 3 classes with approximately one-third of the directors
constituting the Board being elected each year to serve a three-year term. Class
I directors (whose term expires in 2002) are Mr. McDaniel, Mr. Murphy, Mr.
Simmons and Mr. White-Thomson. Class II directors (whose term expires in 2000)
are Dr. Earle, Dr. Jischke, Mr. Keiser, Mr. Richie and Mr. Rompala. Class III
directors (whose term expires in 2001) are Mr. Bradford, Mr. Corbett, Mr.
Genever-Watling, Mr. Morris and Ms. Walters.
<TABLE>
<CAPTION>
NAME, AGE AND BUSINESS EXPERIENCE DURING
POSITION WITH THE COMPANY PAST FIVE YEARS
------------------------- --------------------------
<S> <C>
William E. Bradford, 64...................... Chairman, Halliburton Company, a provider of energy
Director and energy services from 1998; Chairman and Chief
Executive Officer of Dresser Industries, Inc., now
merged with Halliburton Company, from 1996 to 1998;
President and Chief Operating Officer of Dresser
Industries, Inc. from 1992 to 1995.
George D. Christiansen, 54................... Vice President since March 1998; Vice President,
Vice President, Safety and Environmental Environmental Assessment and Remediation from
January 1996 to March 1998; Vice President,
Minerals Exploration, Hydrology and Real Estate,
Safety and Environmental Affairs Division from 1994
to 1996; Vice President, Exploration, Minerals
Exploration Division from 1980 to 1994.
Luke R. Corbett, 52.......................... Chief Executive Officer of Kerr-McGee since February
Chief Executive Officer and Director 27, 1999; Chairman of the Board and Chief Executive
Officer from 1997 to February 26, 1999; President
and Chief Operating Officer from 1995 through
January 1997; Group Vice President from 1992 to
1995.
Kenneth W. Crouch, 55........................ Senior Vice President of Kerr-McGee since 1996;
Senior Vice President Senior Vice President, Exploration, Kerr-McGee Oil
& Gas Corporation since 1996; Senior Vice
President, North America and International
Exploration, Exploration and Production Division
from 1995 to 1996; Vice President and Managing
Director of Exploration for North Sea Operation,
Exploration and Production Division from 1993 to
1995.
</TABLE>
II-38
<PAGE> 77
<TABLE>
<CAPTION>
NAME, AGE AND BUSINESS EXPERIENCE DURING
POSITION WITH THE COMPANY PAST FIVE YEARS
------------------------- --------------------------
<S> <C>
Sylvia A. Earle, 63.......................... Chair, Deep Ocean Exploration and Research, Inc.,
Director since 1992; Explorer-in-Residence for the National
Geographic Society since 1998; Chair of the Sea
Change Trust, a non-profit scientific research
organization from 1993 to 1995; Advisor to the
Administrator from 1992 to 1993; and Chief
Scientist of the National Oceanic and Atmospheric
Administration from 1990 to 1992.
David C. Genever-Watling, 53................. Managing Director, SMG Management L.L.C., an
Director investment firm, since 1997; President and Chief
Executive Officer of General Electric Industrial
and Power Systems from 1992 to 1995.
Julius C. Hilburn, 48........................ Vice President, Human Resources since 1996; Manager,
Vice President, Human Resources Benefits Administration from 1992 to 1996.
Russell G. Horner, Jr., 59................... Senior Vice President and Corporate Secretary of
Senior Vice President, General Counsel and Kerr-McGee since 1997; General Counsel since 1986;
Corporate Secretary Vice President form 1986 to 1997.
Martin C. Jischke, 57........................ President of Iowa State University since 1991.
Director
Robert L. Keiser, 56......................... Chairman of the Board of Kerr-McGee Corporation since
Chairman of the Board February 27, 1999; Chairman of the Board and Chief
Executive Officer of Oryx Energy Company from 1994
to February 26, 1999.
Deborah A. Kitchens, 42...................... Vice President and Controller since 1996; Controller,
Vice President and Controller Exploration and Production Division from 1992 to
1996.
John C. Linehan, 59.......................... Executive Vice President of Kerr-McGee since 1997;
Executive Vice President and Chief Chief Financial Officer since 1987; Senior Vice
Financial Officer President from 1987 to 1997.
Tom J. McDaniel, 60.......................... Vice Chairman of the Board of Kerr-McGee since
Vice Chairman and Director February 1997; Senior Vice President and Corporate
Secretary from 1989 through January 1997.
William C. Morris, 60........................ Chairman of the Board of J. & W. Seligman & Co.,
Director Inc., an investment firm; Chairman of the Board of
Tri-Continental Corporation and Chairman of the
Boards of the companies in the Seligman family of
investment companies, all since December 1988.
Chairman of the Board of Carbo Ceramics, Inc. since
1987.
</TABLE>
II-39
<PAGE> 78
<TABLE>
<CAPTION>
NAME, AGE AND BUSINESS EXPERIENCE DURING
POSITION WITH THE COMPANY PAST FIVE YEARS
------------------------- --------------------------
<S> <C>
John J. Murphy, 67........................... Managing Director of SMG Management L.L.C., an
Director investment firm, since January 1997; Chairman of
the Board of Dresser Industries, Inc., hydrocarbon
energy products and services, from 1983 through
November 1996; Chief Executive Officer of Dresser
Industries, Inc. from 1983 to 1995.
John M. Rauh, 49............................. Treasurer since 1996; Vice President since 1987;
Vice President and Treasurer Controller From 1987 to 1996.
Leroy C. Richie, 57.......................... President, Intrepid World Communications since
Director September 1998; Vice President and General Counsel
for Automotive Legal Affairs, Chrysler Corporation,
1990 through December 1997.
Richard R. Rompala, 52....................... Chairman of the Board, President and Chief Executive
Director Office of The Valspar Corporation, a manufacturer
of paints and related coatings, since February
1998; President and Chief Executive Officer from
1995 to January 1998; President in 1994; Group Vice
President of PPG Industries from 1987 to 1994.
Matthew R. Simmons, 55....................... President of Simmons & Company International, a
Director specialized investment banking firm that serves the
worldwide energy service industry, since founding
the company in 1974.
Jean B. Wallace, 44.......................... Vice President, General Administration since 1996;
Vice President, General Administration Vice President, Human Resources from 1989 to 1996.
Farah M. Walters, 54......................... President and Chief Executive Officer of University
Director Hospitals Health System of Cleveland, Ohio since
1992.
Michael G. Webb, 51.......................... Senior Vice President of Kerr-McGee since 1993;
Senior Vice President Senior Vice President, Exploration, Exploration and
Production Division from 1993 to 1996.
Ian L. White-Thomson, 62..................... Chairman of U.S. Borax, Inc.,a provider of borax and
Director borate products since 1996; President and Chief
Executive from 1996 to 1999; Chief Executive
Officer of Rio Tinto Borax Ltd. since 1995.
W. Peter Woodward, 50........................ Senior Vice President of Kerr-McGee since June 1997;
Senior Vice President Senior Vice President of Kerr-McGee Chemical
Corporation since June 1997; Senior vice president,
Chemical Marketing of Kerr-McGee Chemical
Corporation from may 1996 through May 1997.
Director, Pigment Business Management of Kerr-McGee
Chemical Corporation from 1993 through April 1996.
</TABLE>
II-40
<PAGE> 79
ITEM 11. EXECUTIVE COMPENSATION
The directors, officers and employees of the Company (the managing general
partner) receive no direct compensation from the Partnership for their services
to the Partnership. Such persons receive compensation from the Company, a
substantial portion of which is generally reimbursed to the Company by the
Partnership as costs allocable to it. (See Note 3 to the Consolidated Financial
Statements.)
The Partnership reimburses the Company for all direct costs and indirect
costs associated with the Partnership's activities. For the year 1998, the
Company received $57 million as reimbursement of costs allocable to the
Partnership. Such amounts included salaries of employees and allocations of
certain executive and administrative expenses. The aggregate amount reimbursed
by the Partnership to the Company in 1998 for the salaries of the Chief
Executive Officer of the Partnership and each of the four most highly
compensated executive officers of the Partnership other than the Chief Executive
Officer was approximately $1 million. (See Note 3 to the Consolidated Financial
Statements.)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information regarding beneficial
ownership of the limited partnership units of Sun Energy Partners, L.P. as of
March 1, 1999.
UNITS OF SUN ENERGY PARTNERS, L.P.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
BENEFICIAL OWNER UNITS CLASS
---------------- ----------- ----------
<S> <C> <C>
Kerr-McGee Corporation
123 Robert S. Kerr Avenue
Oklahoma City, OK 73102................................... 413,627,359 98.2*
All Directors and Executive Officers of Managing General
Partner (Kerr-McGee Corporation) as a Group (24).......... -- --
</TABLE>
- ------------------------------
* Assumes that Kerr-McGee Corporation's 292,000,000 general partnership units
are converted into limited partnership units of Sun Energy Partners, L.P.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In its capacity as managing general partner of the Partnership, the Company
controls the Partnership and its operations and has served as a lender and
borrower of funds for the Partnership. Following is a table which summarizes
lending activities between the Partnership and the Company during the year ended
December 31, 1998:
<TABLE>
<CAPTION>
BALANCE DUE BALANCE DUE
FROM FROM
PARTNERSHIP PARTNERSHIP
DECEMBER 31, 1997 ADDITIONS REPAYMENTS DECEMBER 31, 1998
----------------- --------- ---------- -----------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Variable Rate Advances to Oryx Energy
Company................................ $(49) $(186) $147 $(88)
===== ====== ==== =====
9.75% Note Payable to Oryx Energy
Company................................ $(51) $ -- $ 13 $(38)
===== ====== ==== =====
</TABLE>
During 1998, no amounts were owed to the Partnership by the Company for
variable rate advances. The largest balance owed to the Company by the
Partnership during 1998 resulting from advances from Oryx Energy Company and
amounts due under the 9.75% Note Payable was $259 million. Certain information
required by this section is included in Notes to the Consolidated Financial
Statements. See Notes 1, 3 and 8 included elsewhere in this Form 10-K.
II-41
<PAGE> 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following Documents are filed as a part of this report:
1. Financial Statements:
See Index to Financial Statements, Supplementary Financial and Operating
Information on page 13.
2. Exhibits:
<TABLE>
<C> <S>
2 -- Agreement and Plan of Merger, dated as of March 9, 1999,
between Sun Energy Partners, L.P. and Kerr-McGee Energy
Corporation
3(a) -- Second Amended and Restated Agreement of Limited
Partnership of Sun Energy Partners, L.P., dated
December 10, 1985 (incorporated by reference to Exhibit
3(a) of the Form SE filed March 20, 1986)
3(a)(i) -- Amendment No. 1, dated March 9, 1999, to the Second
Amended and Restated Agreement of Limited Partnership
of Sun Energy Partners, L.P.
3(b) -- Certificate of Limited Partnership of Sun Energy
Partners, L.P., dated October 1, 1985 (incorporated by
reference to Exhibit 3(b) of the Partnership's Form
10-K for the one month ended December 31, 1985)
3(b)(i) -- Certificate of Amendment, dated March 9, 1999, to the
Certificate of Limited Partnership of Sun Energy
Partners, L.P.
4(a) -- Deposit Agreement, made as of December 3, 1985 among Sun
Energy Partners, L.P., Manufacturers Hanover Trust
Company, Sun Company, Inc., Oryx Energy Company and All
Limited Partners in Sun Energy Partners, L.P.
(incorporated by reference to Exhibit 4(a) of the Form
SE filed March 20, 1986)
4(b) -- Instruments defining the rights of security holders,
including indentures: The Partnership will provide
copies of the instruments relating to long-term debt to
the SEC upon request
12 -- Computation of Consolidated Ratios of Earnings to Fixed
Charges
21 -- Affiliated Operating Partnerships/Subsidiary Corporations
of Sun Energy Partners. L.P. (incorporated by reference
to Exhibit 22 of the Form SE filed March 18, 1988)
24 -- Power of Attorney executed by certain officers and
directors of Kerr-McGee Corporation, managing general
partner of Sun Energy Partners, L.P.
27 -- Financial Data Schedule
99(a) -- Agreement of Limited Partnership of Sun Operating Limited
Partnership dated November 18, 1985, as amended
(incorporated by reference to Exhibit 28(a) of the Form
SE filed March 20, 1986)
99(b) -- Certificate of Limited Partnership of Sun Operating
Limited Partnership dated November 19, 1985
(incorporated by reference to Exhibit 28(b) of the
Partnership's Form 10-K for the one month ended
December 31, 1985)
99(c) -- Sun Operating Limited Partnership 9.75% Promissory Note
(incorporated by reference to Exhibit 28(c) of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, as amended by Amendment
No. 1 on Form 8 dated July 17, 1992, Commission File
No. 1-9033)
99(d) -- Letter Agreement Dated November 21, 1990, Between Oryx
Energy Company and Atlantic Richfield Company
(incorporated by reference to Exhibit 28(a) of the
Partnership's Current Report on Form 8-K dated January
31, 1991, Commission File No. 1-9033)
99(e) -- Amendment Dated November 28, 1990 to Letter Agreement
Dated November 21, 1990, Between Oryx Energy Company
and Atlantic Richfield Company (incorporated by
reference to Exhibit 28(b) of the Partnership's Current
Report on Form 8-K dated January 31, 1991, Commission
File No. 1-9033)
</TABLE>
(b) Reports on Form 8-K:
The Partnership did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
II-42
<PAGE> 81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUN ENERGY PARTNERS, L.P.
By: KERR-MCGEE CORPORATION
(Managing General Partner)
By: /s/ JOHN C. LINEHAN
----------------------------------
John C. Linehan
Executive Vice President and
Chief Financial Officer
Date: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by or on behalf of the following persons on behalf
of the Registrant and in the capacities with Kerr-McGee Corporation, Managing
General Partner, and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
WILLIAM E. BRADFORD* Director March 24, 1999
- -----------------------------------------------------
William E. Bradford
LUKE R. CORBETT* Chief Executive Officer and March 24, 1999
- ----------------------------------------------------- Director (principal executive
Luke R. Corbett officer)
SYLVIA A. EARLE* Director March 24, 1999
- -----------------------------------------------------
Sylvia A. Earle
DAVID C. GENEVER-WATLING* Director March 24, 1999
- -----------------------------------------------------
David C. Genever-Watling
MARTIN C. JISCHKE* Director March 24, 1999
- -----------------------------------------------------
Martin C. Jischke
ROBERT L. KEISER* Chairman of the Board March 24, 1999
- -----------------------------------------------------
Robert L. Keiser
/s/ JOHN C. LINEHAN Executive Vice President and Chief March 24, 1999
- ----------------------------------------------------- Financial Officer (principal
John C. Linehan financial officer)
TOM J. MCDANIEL* Vice Chairman and Director March 24, 1999
- -----------------------------------------------------
Tom J. McDaniel
WILLIAM C. MORRIS* Director March 24, 1999
- -----------------------------------------------------
William C. Morris
JOHN J. MURPHY* Director March 24, 1999
- -----------------------------------------------------
John J. Murphy
LEROY C. RICHIE* Director March 24, 1999
- -----------------------------------------------------
Leroy C. Richie
RICHARD M. ROMPALA* Director March 24, 1999
- -----------------------------------------------------
Richard M. Rompala
</TABLE>
II-43
<PAGE> 82
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
MATTHEW R. SIMMONS* Director March 24, 1999
- -----------------------------------------------------
Matthew R. Simmons
FARAH M. WALTERS* Director March 24, 1999
- -----------------------------------------------------
Farah M. Walters
IAN L. WHITE-THOMSON* Director March 24, 1999
- -----------------------------------------------------
Ian L. White-Thomson
*By: /s/ JOHN C. LINEHAN
- -----------------------------------------------------
John C. Linehan
Attorney-in-Fact
</TABLE>
- ------------------------------
* Original powers of attorney authorizing Luke R. Corbett, Tom J. McDaniel and
John C. Linehan or any one of them, to sign this Form 10-K Annual Report on
behalf of Sun Energy Partners, L.P., is being filed as an Exhibit to this Form
10-K.
II-44
<PAGE> 83
EXHIBIT 12
SUN ENERGY PARTNERS, L.P.
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS
TO FIXED CHARGES -- UNAUDITED(A)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997
------- -------
<S> <C> <C>
Ratio of Earnings to Fixed Charges:
Fixed Charges:
Consolidated interest cost and debt expense....... $ 20 $ 15
Interest allocable to rental expense(b)........... 2 2
----- -----
Total................................... $ 22 $ 17
===== =====
Earnings:
Consolidated income (loss)........................ $ (44) $ 239
Fixed charges..................................... 22 17
Interest capitalized.............................. (12) (15)
amortization of previously capitalized interest... 7 4
----- -----
Total................................... $ (27) $ 245
===== =====
Ratio of Earnings to Fixed Charges(c)....................... 14.41
=====
</TABLE>
- ---------------
(a) The consolidated financial statements of Sun Energy Partners, L.P. include
the accounts of all subsidiaries (more than 50 percent owned and/or
controlled).
(b) Represents one-third of total operating lease rental expense which is that
portion deemed to be interest.
(c) Since earnings for the year ended December 31, 1998 were less than zero, the
ratio of earnings to fixed charges for such period is not meaningful and,
accordingly, has not been presented. Earnings for such period were
inadequate to cover fixed charges by $49 million.
II-45
<PAGE> 84
PART III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9033
SUN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 75-2070723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
123 Robert S. Kerr Ave., Oklahoma City, OK 73102
(Address of principal executive offices) (Zip code)
(405) 270-1313
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
---------------------
The total number of Partnership Units outstanding as of April 30, 1999 was
421,170,459.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 85
FORWARD-LOOKING STATEMENTS
In the following report, Sun Energy Partners, L.P. has included certain
statements (other than statements of historical fact) that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used
herein, the words "budget", "budgeted", "anticipate", "expects", "believes",
"seeks", "goals", "intends" or "projects" and similar expressions are intended
to identify forward-looking statements. It is important to note that Sun Energy
Partners, L.P.'s actual results could differ materially from those projected by
such forward-looking statements. Although Sun Energy Partners, L.P. believes the
expectations reflected in such forward-looking statements are reasonable and
such forward-looking statements are based upon the best data available at the
time this report is filed with the Securities and Exchange Commission, no
assurance can be given that such expectations will prove correct. Factors that
could cause Sun Energy Partners, L.P.'s results to differ materially from the
results discussed in such forward-looking statements include, but are not
limited to, the following: production variances from expectations, volatility of
oil and gas prices, the need to develop and replace its reserves, the
substantial capital expenditures required to fund its operations, exploration
uses, environmental risks, uncertainties about estimates of reserves,
competition, government regulation and political actions, and the ability of Sun
Energy Partners, L.P. to implement its business strategy. All such
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
III-2
<PAGE> 86
SUN ENERGY PARTNERS, L.P.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998........................ 4
Condensed Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998........................................... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998.................. 6
Notes to Condensed Consolidated Financial Statements........ 7
Report of Independent Accountants........................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
SIGNATURE............................................................. 12
</TABLE>
III-3
<PAGE> 87
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
REVENUES
Oil and gas............................................... $ 109 $ 138
Other..................................................... (3) 8
-------- --------
106 146
-------- --------
COSTS AND EXPENSES
Operating costs........................................... 26 37
Production taxes.......................................... 4 8
Exploration costs......................................... 9 41
Depreciation, depletion and amortization.................. 46 49
General and administrative expense........................ 6 11
Interest and debt expense................................. 4 4
Interest capitalized...................................... -- (4)
-------- --------
95 146
-------- --------
Net Income.................................................. $ 11 $ --
======== ========
Net Income Per Unit......................................... $ .03 $ --
======== ========
Cash Distributions Paid Per Unit............................ $ -- $ .02
======== ========
Weighted Average Number of Units Outstanding (in
thousands)................................................ 421,171 421,171
======== ========
</TABLE>
(See Accompanying Notes)
III-4
<PAGE> 88
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and short-term investments........................... $ 5 $ 6
Accounts receivable and other current assets.............. 97 65
------ ------
Total Current Assets........................................ 102 71
Properties, Plants and Equipment (Note 2)................... 1,243 1,221
Investment in Affiliate..................................... 79 79
Other....................................................... 4 3
------ ------
Total Assets................................................ $1,428 $1,374
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Advances from affiliate................................... $ 149 $ 88
Accounts payable.......................................... 51 58
Accrued liabilities....................................... 51 50
Current portion of long-term debt due affiliate........... 14 14
Current portion of long-term debt......................... 1 1
------ ------
Total Current Liabilities................................... 266 211
Long-Term Debt due Affiliate................................ 20 24
Deferred Credits and Other Liabilities...................... 30 37
Partners' Capital (Note 3)
Limited partnership interests............................. 341 338
General partnership interests............................. 771 764
------ ------
Partners' Capital........................................... 1,112 1,102
------ ------
Total Liabilities and Partners' Capital..................... $1,428 $1,374
====== ======
</TABLE>
The successful efforts method of accounting is followed.
(See Accompanying Notes)
III-5
<PAGE> 89
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31
-------------
1999 1998
---- -----
(UNAUDITED)
<S> <C> <C>
CASH AND CASH EQUIVALENTS FROM OPERATING ACTIVITIES
Net income.................................................. $ 11 $ --
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation, depletion and amortization.................. 46 49
Dry hole costs and leasehold impairment................... 1 26
Loss (gain) on divestments................................ 3 (5)
Changes in working capital:
Advances from affiliate................................ 61 23
Accounts receivable and other current assets........... (34) 38
Accounts payable and accrued liabilities............... (6) 47
---- -----
Net Cash Flow Provided From Operating Activities............ 82 178
---- -----
CASH AND CASH EQUIVALENTS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (67) (155)
Other..................................................... (12) (12)
---- -----
Net Cash Flow Used In Investing Activities.................. (79) (167)
---- -----
CASH AND CASH EQUIVALENTS FROM FINANCING ACTIVITIES
Repayments of long-term debt.............................. (4) (3)
Cash distributions paid to unit holders................... -- (9)
---- -----
Net Cash Flow Used In Financing Activities.................. (4) (12)
---- -----
CHANGES IN CASH AND CASH EQUIVALENTS........................ (1) (1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6 2
---- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5 $ 1
==== =====
</TABLE>
(See Accompanying Notes)
III-6
<PAGE> 90
SUN ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and related
notes of Sun Energy Partners, L.P. and its subsidiaries (hereinafter, unless the
context otherwise requires, being referred to as the Partnership) are presented
in accordance with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting principles or
those normally made in annual reports on Form 10-K. In management's opinion, all
adjustments necessary for a fair presentation of the results of operations for
the periods shown have been made and are of a normal recurring nature. The
results of operations of the Partnership for the three months ended March 31,
1999 are not necessarily indicative of the results for the full year 1999.
The Partnership has adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income and net
income are identical for the periods ended March 31, 1999 and 1998.
2. PROPERTIES, PLANTS AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
--------- ------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Gross property.............................................. $3,865 $3,853
Less accumulated depreciation, depletion and amortization... 2,622 2,632
------ ------
Net property................................................ $1,243 $1,221
====== ======
</TABLE>
3. PARTNERS' CAPITAL
At March 31, 1999, the ownership of the Partnership was comprised of a 69
percent general partnership interest and a 31 percent limited partnership
interest. Prior to February 26, 1999, Oryx Energy Company (Oryx) controlled the
Partnership and was its managing general partner. On that date, Kerr-McGee
Corporation (Kerr-McGee) became managing general partner following its merger
with Oryx, and Kerr-McGee now holds a 98.2 percent interest in the Partnership.
A 1.8 percent limited partnership interest in the form of depositary units is
held by the public. As of March 31, 1999, there were a total of 421.2 million
units outstanding.
4. PLANNED MERGER
On March 9, 1999, Kerr-McGee, as managing general partner, announced that
its Board of Directors had approved a plan to merge Sun Energy Partners with
Kerr-McGee Energy Corporation (an indirect wholly-owned subsidiary of
Kerr-McGee). As part of the transaction, each of the publicly held limited
partnership units will be converted solely into the right to receive $4.52 in
cash, and as a result, Kerr-McGee will own 100% of Sun Energy Partners. The
transaction is subject to customary closing conditions and regulatory approvals
and is expected to be completed by the third quarter, 1999. Early termination of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, was granted effective on April 7, 1999. Amendment No. 1 to the
preliminary Information Statement on Schedule 14C was filed with the Securities
Exchange Commission on May 3, 1999, pursuant to the Securities Exchange Act of
1934.
III-7
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Sun Energy Partners, L.P. and
the Board of Directors of Kerr-McGee Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Sun Energy Partners, L.P. and its Subsidiaries as of March 31, 1999 and the
related condensed consolidated statements of income and cash flows for the three
months ended March 31, 1999 and 1998. These financial statements are the
responsibility of Kerr-McGee Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of income and cash flows for the year then ended
(not presented herein); and in our report dated February 22, 1999, except for
Note 14 as to which the date is March 9, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
May 7, 1999
III-8
<PAGE> 92
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
The Partnership's cash and cash equivalents decreased by $1 million over
the three months ended March 31, 1999. Cash flows for the first quarter of 1999
included $82 million provided from operating activities, $79 million used for
investing activities and $4 million used for financing activities. The $82
million net cash flow provided from operating activities was comprised of $61
million net cash flow provided from operating activities before changes in
current assets and liabilities and $21 million of net cash flow provided from
changes in current assets and liabilities. The $61 million net cash flow
provided from operating activities before changes in current assets and
liabilities was negatively impacted by decreased crude oil and natural gas
prices and decreased natural gas volumes. The $21 million net cash flow provided
from changes in current assets and liabilities consisted of a $61 million
increase in advances from affiliate, a $34 million increase in accounts
receivable and other current assets and a $6 million decrease in accounts
payable and accrued liabilities.
The $79 million net cash flow used for investing activities consisted
primarily of $67 million used for capital expenditures. The $4 million net cash
flow used for financing activities resulted from the scheduled payment of $4
million of long-term debt.
As a result of a combination of low operating cash flow and high capital
expenditures, no cash distribution will be paid for the 1999 first quarter.
Distributions will fluctuate due to oil and gas prices, production volumes,
operating costs, capital expenditures, exploration expenses and divestment
proceeds.
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $11 million compared to
break-even in the first quarter of 1998. Revenues for the 1999 first quarter
were $106 million versus $146 million for the first quarter of 1998. In
comparing the first quarter of 1999 with the first quarter of 1998, crude oil
prices decreased by $3.65 per barrel and natural gas prices decreased $.27 per
million cubic feet. Crude oil production per barrel per day was the same for
both periods and natural gas volumes decreased 25 million cubic feet per day.
The reduction in gas volumes resulted primarily from December 1998 divestitures
and production declines.
Average net production of crude oil and condensate was 48 thousand barrels
daily during the first quarters of 1999 and 1998. The average crude oil and
condensate price in the first quarter of 1999 decreased to $11.40 per barrel, as
compared with $15.05 per barrel in the same period last year.
Average net production of natural gas for the first quarter of 1999 was 353
million cubic feet daily compared with average net production of 378 million
cubic feet daily for the same period in 1998. The average natural gas price for
the first quarter of 1999 was $1.89 per thousand cubic feet, as compared with
$2.16 per thousand cubic feet in the same period last year.
Prior to February 26, 1999, Oryx Energy Company (Oryx) controlled Sun
Energy Partners and was its managing general partner. On that date, Kerr-McGee
Corporation (Kerr-McGee) became managing general partner following its merger
with Oryx, and Kerr-McGee now controls Sun Energy Partners. The Company refers
to Oryx prior to February 26, 1999 and to Kerr-McGee since February 26, 1999.
On March 9, 1999, Kerr-McGee, as managing general partner, announced that
its Board of Directors had approved a plan to merge Sun Energy Partners with
Kerr-McGee Energy Corporation (an indirect wholly-owned subsidiary of
Kerr-McGee). (See Note 4 to the Condensed Consolidated Financial Statements.)
YEAR 2000 READINESS
In 1996, the Company established a formal Year 2000 Program (Program) to
assess and correct Year 2000 problems in both information technology and
non-informational technology systems. The Program is organized into two major
areas: business systems and facilities integrity. Business systems
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include replacement and upgrade of computer hardware and software, including
major business applications, such as purchasing, inventory, engineering,
financial, human resources, etc. Facilities integrity encompasses
telecommunications, plant process controls, instrumentation and embedded chip
systems as well as an assessment of third party Year 2000 readiness.
As a result of the merger of Oryx with Kerr-McGee, the Company is
undertaking steps to minimize Year 2000 problems that might adversely impact the
Partnership.
To date, activities associated with business systems have included:
- inventory and assessment
- remediation and testing of legacy systems and hardware
- communication with critical business partners
Ongoing activities include:
- conversion of data from Oryx's financial, human resources, production,
technical and other systems into Year 2000 compliant systems utilized by
the Partnership
- remediating and testing certain Oryx legacy systems that will be retained
and utilized by the Partnership
- replacement of hardware and operating systems with Kerr-McGee Year 2000
compliant systems
- Year 2000 integration testing of converted and remediated systems to
ensure proper functionality beyond 2000
These activities are scheduled to be complete near the end of third
quarter, 1999. Costs expended to date by the Partnership are approximately $2.0
million. Total forecasted costs are approximately $3.6 million, but are being
re-evaluated by the Company as a result of the merger. Management believes that
the costs are not material to the Partnership's results of operations, financial
position or cash flow.
To date, major activities associated with facilities integrity have
included:
- inventory and assessment
- remediation
- testing and verification
Inventory and assessment activities are essentially complete with
remediation and testing and verification scheduled for completion in third
quarter, 1999. Additional activities will be incorporated and include
communication with third party vendors, suppliers and partners, and development
of contingency plans. These activities are expected to be complete in late third
quarter or early fourth quarter, 1999. Overall, facilities integrity activities
are approximately 70 percent complete.
Costs expended to date have been minor for facilities associated with the
Partnership. Forecasted costs to complete these activities are approximately
$200,000, but are being re-evaluated by the Company as a result of the merger.
Management believes that the Program is comprehensive and reduces Year 2000
risks associated with internal systems to a manageable level. Regardless of
management's efforts to assess and verify readiness there can be no assurance
that all entities affecting the Company will be Year 2000 ready. To address
these concerns, contingency plans will be developed. However, failure by a third
party to remediate their Year 2000 issues in a timely manner could have a
material effect to the Partnership's result of operations and cash flows in a
particular quarter or annual period. Failure of a critical operating or safety
component, or failure by a key third party supplier or customer are believed to
be the most reasonably likely worst case scenarios that could impact the
Partnership.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two purported class action lawsuits entitled Kaplan v. Sun Energy Partners,
L.P. and Greenfield v. Sun Energy Partners, L.P. have been filed in Delaware
Chancery Court by several unit holders. The complaints in these actions
variously name as defendants Sun Energy Partners, Kerr-McGee Corporation, former
directors of Oryx Energy Company and Kerr-McGee Corporation directors. Among
other things, the plaintiffs allege that the defendants have breached fiduciary
and common law duties by failing to offer a fair price to unit holders in the
merger, failing to negotiate the purchase price at arms-length, failing to
obtain an independent valuation of the units and of Sun Energy Partners, and
otherwise seeking to enrich themselves to the detriment of the unit holders. The
plaintiffs further allege that the merger is timed to take advantage of the
depressed market price of the units and that the purchase price is grossly
inadequate relative to the market price of the units prior to the announcement
of the merger and the premium paid in Kerr-McGee Corporation's merger with Oryx.
These lawsuits seek unspecified damages and costs and to enjoin or rescind the
merger, among other things. Sun Energy Partners and Kerr-McGee Corporation
believe that these lawsuits are wholly without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
The Partnership did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
We are pleased to furnish this report to unit holders who request it by
writing to:
Sun Energy Partners, L.P. Unit holder Relations
c/o Kerr-McGee Corporation
Managing General Partner
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma 73102
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN ENERGY PARTNERS, L.P.
By: KERR-MCGEE CORPORATION
----------------------------------
(Managing General Partner)
By: /s/ DEBORAH A. KITCHENS
----------------------------------
Deborah A. Kitchens
(Vice President and Controller
and Chief Accounting Officer)
Date: May 7, 1999
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